You are working

as

a consultant to the Lulu Athletic Clothing Company, and you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of the firm's current capital structure (which the firm considers to be its target mix of financing sources) as follows:

To finance the purchase, Lulu will sell

20-year

bonds with a

$1,000

par value paying

6.1

percent per year (with interest paid semiannually) at the market price of

$1,038.

Preferred stock paying a

$2.47

dividend can be sold for

$34.27.

Common stock for Lulu is currently selling for

$49.81

per share. The firm paid a

$4.05

dividend last year and expects dividends to continue growing at a rate of

4.1

percent per year for the indefinite future. The firm's maginal tax rate is

34

percent. What discount rate should you use to evaluate the warehouse project?