Bluefield Corporation has 5 million shares of common stock outstanding, 750,000 shares of 7 percent $100 par preferred common stock outstanding, and 250,000 11% coupon bonds outstanding, par value 1,000 each, interest paid semiannually. The stock currently sells for $40 per share and has a beta of 1.2, the preferred stock currently sells for $75 per share, and the bonds have a 15 years to maturity and sell for 93.5 percent of par. The market risk premium is 6 percent, T-bills are yielding 4 percent, and Bluefield’s tax rate is 34 percent.
a. What is the firm’s market value capital structure?
b. If Bluefield is evaluating a new investment project that has the same risk as the firm as a whole, what rate should it use to discount the project’s cash flows?