The

"ABCEasyAs123"

Corporation

has numerous retail

clothing

stores in the Lower

Mainland.

It

s

tax rate is

40 percent.

ABC

is going to expand

i

t

s

business by building a

new retail

store in the Lower Mainland and has

retained you

as a consultant

to determine

the appropriate discount rate to use in their NPV calculations. The CEO of ABC, Michael

Jackson, has told you that the new retail store will require $10 mi

llion and that the fir

m

has enough cash for this project. If the firm had

to

raise money,

bonds

with a

12

-

year

maturity

(to match the

payment frequency and

maturity of the current bonds)

c

ould

be

issued

at an interest rate of

9

percent

. Flotation costs of

5

% of face value wou

ld be

incurred.

$100 par value preferred shares that pay a dividend of 8% are currently trading

at a 10% discount

from their par value

.

Preferred shares could be sold with after

-

tax

issue costs amounting to 4 percent.

C

ommon shares

are trading for $20.

New common

shares could be issued

with

after

-

tax flo

t

ation costs of

10%

. Growth in dividends has

been steady at 5 percent per year, and it is assumed that this will continue. The dividend

for

the current year is expected to be $2

.20

per share.

ABC has

$10,000,000 of bonds

outstanding with a coupon of

10% paid semi

-

annually; 50,000 preferred shares that were

issued at

$100

par

;

and

,

1,000,000 common shares that were issued at $

8.

Calculate the

"

appr

opriate

"

discount rate for ABC