Organic Produce Corporation has 9.3 million shares of common stock outstanding,

Question

Organic Produce Corporation has 9.3 million shares of common stock outstanding, 680,000 shares of 7.3 percent preferred stock outstanding, and 193,000 of 8.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $65.80 per share and has a beta of 1.38, the preferred stock currently sells for $106.20 per share, and the bonds have 14 years to maturity and sell for 87 percent of par. The market risk premium is 6.95 percent, T-bills are yielding 5.65 percent, and the firm’s tax rate is 40 percent.

(a)

What is the firm's market value capital structure?

  

(b)

If the firm is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows?

(a)

What is the firm's market value capital structure?

Explanation / Answer

a)

b)

The firm should use 12.57% as a disounting rate.

**cost of equity =5.65 + 1.38*6.95

                  = 15.241%

Market value Market value of particular security/Total debt Debt (1000*87%)*193000=167,910,000 .20 Preferred stock 680000*106.20=72,216,000 .08 equity 9300000*65.80=611,940,000 .72 Total market vlue 852,066,000 1

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