What rate should the firm use to discount

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When creating your initial post, assume you are the CFO of Hankins Corporation. Given the key financial data below, perform a detailed and thorough financial analysis (show and explain all calculations) that includes the following:

Question 1: What are the respective market value weights for each component of the firm's financing (equity, preferred stock, and debt)?

Question 2: 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? Hint: the firm's WACC is the appropriate discount rate. Compute Hankins' WACC:

Question 3: What is the cost of equity using CAPM?

Key financial data for Hankins Corporation:

  • Common stock outstanding = 5.4 million shares; market value = $64/share; beta = 1.13
  • 5.6% Preferred stock outstanding = 290,000 shares issued with par value = $100 each. Current market value of preferred stock = $103/share. 
  • 6.7% semi-annual bonds outstanding = 125,000 bonds issued with par value = $1,000 each; market value is 109% of par; all bonds mature in 20 years. 
  • Market risk premium = 6.8% 
  • T-bills current yield = 4.3% 
  • Corporate tax rate = 34%

Reference no: EM132645719

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