Firm use to discount the project cash flows

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Loredo Mining Inc. has 10 million shares of common stock outstanding and 237,500 6 percent annual coupon bonds outstanding, par value $1,000 each. The common stock currently sells for $30 per share and has a beta of 1.2, and the bonds have 10 years to maturity and sell for 100 percent of par. The market risk premium is 7 percent, T-bills are yielding 5 percent, and Loredo’s tax rate is 35 percent. a. What is the firm’s market value capital structure? b. If Loredo 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? (Hint: Calculate the WACC.)

Reference no: EM131887620

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