Hankins has 5.4 million shares of outstanding; 290,000 shares of 5.2 percent preferred stock outstanding, of $100; and 125,000 5.7 percent semiannual bonds outstanding, $1,000 each. The currently sells for $72 per share and has a beta of 1.13, the preferred stock currently sells for $103 per share, and the bonds have 20 years to and sell for 103 percent of par. The market risk premium is 6.8 percent, T-bills are yielding 4.3 percent, and the firm’s tax rate is 23 percent.
a. What is the firm’s market value capital structure?
b. If the firm is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows?
