Problem:

Organic Produce Corporation has 8.8 million shares of common stock outstanding, 630,000 shares of 7.3 percent preferred stock outstanding, and 188,000 of 8.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $65.30 per share and has a beta of 1.33, the preferred stock currently sells for $106.70 per share, and the bonds have 14 years to maturity and sell for 89.5 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.

Required:

Question 1: What is the firm's market value capital structure?

Question 2: 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?

Note: Provide support for your underlying principle.