You have been asked to estimate the appropriate discount rate to
use in the evaluation of a new line of business. You have
determined the market value of the firm’s target capital structure
as follows:
Source of Capital
Market Value
Bonds
350,000
Preferred Stock
200,000
Common Stock
450,000
To finance the new project, the company will sell:
12-year bonds with a $1,000 par value paying 8% per year (paid
semiannually) at the market price of $980.
Preferred stock paying a...