What is the appropriate discount rate for new project

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Reference no: EM132047196

A firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity financing for the project. Also, the firm: - has 1,100,000 common shares outstanding - current price $12 per share - next year’s dividend expected to be $1 per share - firm estimates dividends will grow at 5% per year after that - flotation costs for new shares would be $0.20 per share - has 170,000 preferred shares outstanding - current price is $9.50 per share - dividend is $1.00 per share - if new preferred are issued, they must be sold at 5% less than the current market price (to ensure they sell) and involve direct flotation costs of $0.25 per share - has a total of $10,000,000 (par value) in debt outstanding. The debt is in the form of bonds with 10 years left to maturity. They pay annual coupons at a coupon rate of 11.3%. Currently, the bonds sell at 105% of par value. Flotation costs for new bonds would equal 8% of par value. The firm’s tax rate is 40%. What is the appropriate discount rate for the new project?

Reference no: EM132047196

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