Question 3 Mercer Ltd has 10 million shares of common stock outstanding. The common stock is selling for $61 per share and it has a beta of 1.5. It also has 250,000 shares of 6 percent preferred stock outstanding and the par value is $100. The preferred stock currently sells for $91 per share. Mercer also issued 100,000 7 percent semiannual bonds outstanding, par value of $1,000 each. The bonds have 15 years to maturity and sell for 100 percent of par. The firm has just paid a dividend of $0.80 per share to common stockholders, and the dividends are expected to grow at 5 percent forever. The expected return of the market is 12 percent, and Treasury bills are yielding 5.5 percent. The firm's corporate tax rate is 20 percent. What is the firm's market value capital structure? (5 points) b. Calculate the cost of equity using the dividend growth model. (4 points) c. Calculate the cost of equity using the CAPM model (4 points) d. Mercer is evaluating a new investment project that has the same risk as the firm's typical project. The CAPM is applied to estimate the cost of equity. Based on the WACC approach, what is the cost of the capital the firm should use to discount the project's cash flows? (12 a. points)