1) Finding WACC. Organic Produce Corporation has 7.5 million shares of common stock outstanding, 500,000 shares of 7% favoured stock outstanding, and 175,000 of 8.2% semi-annual bonds outstanding, par value $1000 each. Common stock presently sells for $64 per share and has beta of 1.2, the favoured stock presently sells for= $108 per share, and bonds have= 15 yrs to maturity and sell for 96% of par. Market risk premium is 6.8%, T-bills are yielding 5.5%, and firm’s tax rate is 34%.
a) Determine the firm’s market value capital structure.
b) If firm is estimating a new investment project which has same risk as firm’s typical project, what rate must firm use to discount project’s cash flows?