A firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity and debt financing for the project. Also, the firm:

• has 1,250,000 common shares outstanding
• current price $12.25 per share
• next years dividend expected to be $1.25 per share
• firm estimates dividends will grow at 5% per year after that
• flotation costs for new shares would be $0.10 per share
• has 250,000 preferred shares outstanding
• current price is $9.50 per share
• dividend is $0.95 per share
• if new preferred are issued it would cost the firm flotation costs of $0.25 per share
• has a total of $10,000,000 (par value) in debt outstanding. Present market yields on similar Baa-rated bonds are 12.1 percent. Currently, the bonds sell at 106% of par value.

The firms tax rate is 40%. What is the appropriate discount rate for the new project?