Hankins Corporation has 7.9 million shares of common stock outstanding, 540,000

Question

Hankins Corporation has 7.9 million shares of common stock outstanding, 540,000 shares of 7.4 percent preferred stock outstanding, and 179,000 of 8.6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64.40 per share and has a beta of 1.24, the preferred stock currently sells for $107.60 per share, and the bonds have 13 years to maturity and sell for 94 percent of par. The market risk premium is 7 percent, T-bills are yielding 5.7 percent, and the firm’s tax rate is 35 percent.

a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)
  

b. If the firm is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Weighted average cost of capital             %

Market value weight of debt Market value weight of preferred stock Market value weight of equity

Explanation / Answer

rate to discount cash flows = 11.90%

Market value weight cost weight*cost equity          508,760,000.00 0.6921 14.38% 0.0995 debt          168,260,000.00 0.2289 6.12% 0.0140 preferred share            58,104,000.00 0.0790 6.88% 0.01

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