Zambia Mining Corporation has 9 million shares of common stock outstanding, 500,000 shares of 7 percent preferred stock outstanding, and 120,000 8.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.20, the preferred stock currently sells for $83 per share, and the bonds have 15 years to maturity and sell for 93 percent of par. The market risk premium is 10 percent, T-bills are yielding 5 percent, and Zambia Minings tax rate is 35 percent.

(a) If Zambia Mining is evaluating a new investment project that has the same risk as the firms typical project, what rate should the firm use to discount the projects cash flows?