EM Corporation has 8 million shares of common stock outstanding, 1 million shares of $6 preferred stock outstanding, and 100,000 9 % semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $35 per share and has a beta of 1.0, the preferred stock currently sells for $60 per share, and the bonds have 15 years to maturity and sell for 89% of par. The market risk premium is 8%, T-bills are yielding 5%, and EM’s tax rate is 34%.
a. What is the company’s market value capital structure?
b. If EM is evaluating a new investment project that has the same risk as the company’s typical project, what rate should the company use to discount the project’s cash flow?