Happy Resorts Company currently has 1.2 million common shares of stock outstanding, and the stock has a beta of 2.2. It also has \($10\) million face value of bonds that have five years remaining to maturity and an 8% coupon with semi-annual payments and are priced to yield 13.65%. If Happy issues up to \($2.5\) million of new bonds, the bonds will be priced at par and will have a yield of 13.65%; if it issues bonds beyond \($2.5\) million, the expected yield on the entire issuance will be 16%. Happy has learned that it can issue new common stock at \($10\) a share. The current risk-free rate of interest is 3%, and the expected market return is 10%. Happy’s marginal tax rate is 30%. If Happy raises

\($7.5\) million of new capital while maintaining the same debt-to-equity ratio, its weighted average cost of capital will be closest to:

A. 14.5%.

B. 15.5%.

C. 16.5%.