Q7-1: Finding the WACC

Blue Corp has 5 million shares of common stock outstanding, 750,000 shares of 7% preferred stock outstanding, and 250,000 11% semi-annual bonds outstanding, par value $1,000 each. The stock sells for $40 per share and has a beta of 1.3, the preferred stock currently sells for $75 per share, and the bonds have 15 years to maturity and sell for 93.5% of par. The market risk premium is 6%, T-bills are yielding 4%, and Blues tax rate is 35%.

• What is the firms market value capital structure?
• If Blues is evaluating a new investment project that has the same risk as the firms typical project, what rate should it use to discount the projects cash flow?