Problem:
(Weighted average cost of capital) As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of the firm's current capital structure (which the firm considers to be its target mi of financing sources) as follows: Source of capital Market Values Bonds $480000 Preferred stock $140000 Common stock $400000 To finance the purchase, GBH will sell 20-year bonds with a $1000 par value paying 7.9 percent per year (paid semiannually) at the market price of $928. Preferred stock paying a $2.55 dividend can be sold for $34.76. Common stock for GBH is currently selling for $49.62 per share. The firm paid a $3.94 dividend last year and expects dividends to continue at a rate of 3.8 percent per year into the indefinite future. The firm's marginal tax rate is 34 percent. What discount rate should you use to evaluate the warehouse project?
Required:
a. Calculate component weights of capital. The weight of debt in the firm's capital structure is ___%. Please provide step by step solution.