Problem
Raymond Mining Corporation has 9 million shares of common stock outstanding, 150,000 shares of 4% preferred stock outstanding, and 140,000 semiannual bonds outstanding with a 6.00% coupon and par value of 1,000 each. The common stock currently sells for $50 per share and has a beta of 1.5, the preferred stock currently sells for $80 per share, and the bonds have seven years to maturity and sell for 105% of par. The market risk premium is 7.00%, T-bills yield 3%, and the company's tax rate is 30%.
1. What is the firm's market value capital structure?
2. If Raymond Mining is evaluating a new investment project with the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows?