Company ASDF has 10 million of common shares outstanding, traded at $70 per share. Market beta of those shares is 0.8. Expected market return is 6% and risk-free rate is 1%. The company also has 1 million of preferred stocks outstanding. Each stock is traded at $105, has dividend rate of 8% and par value of $100; dividends are paid annually.1 It also has two bond issues outstanding. Bond A matures in 10 years, has face value of $1,000 and coupon rate of 10% (coupons are paid annually). Current market price of bond A is $1,200. Bond B is a zero-coupon bond, with face value of $1,000. It matures in 5 years and is currently traded at 80% of par. There are 100,000 bonds of type A and 20,000 bonds of type B issued. Tax rate is 15%.
(a) What is capital structure of the company (that is, what are weights of equity and debt in the companyâ€™s total value)?
(b) Suppose that ASDF plans to expand its operations by launching a project that has a risk profile common to existing ASDFâ€™s projects. What rate should be used to discount cash flows of such a project?