Your firm is considering raising capital for a new investment project. Currently the firm has $20 million of debt and $30 million of common equity. The new project requires an investment of $10 million. The Chief Financial Officer plans to issue $3 million of debt, $6 million of common stock, and $1 million of preferred stock to fi-nance the project. The newly-issued bond will have a coupon rate of 5% and yield to maturity of 4%. The proper beta to use for the newly-issued common stock is 1.6. The preferred stock will pay a constant annual dividend of $2 per share forever and will be sold at a price of $25 per share. Suppose the firms marginal tax rate is 35%, the risk-free rate is 2%, and the market risk premium is 5%.

(A)Calculate the cost of common equity using CAPM approach (6 points)

(B)Calculate the cost of preferred stock from the perpetuity formula (6 points)

(C)Calculate the proper discount rate (WACC) for this project. (8 points)