Weighted average cost of capital Your firm has two types of bonds. First, there are 3,000 bonds outstanding with a 7 % coupon rate and a yield to maturity of 6.5 %. These bonds are selling at $1,098.71. Also, there are 10,000 bonds outstanding with a 5 % coupon rate and a 4.5 % yield to maturity.

These bonds are selling at $1,102.98. The remaining capital structure is comprised of 1.2 million shares of common stock selling at $34.00 per share. In addition, the firm just paid a dividend of $1.37, and the growth rate of dividends has averaged 5.6 % over the past 25 years.

The covariance between your firm and the market is 16 %, while the variance of the market is 38 %. The expected return on the market is 12 %, and the T-bill rate is 3.21 %. 

1. What is the estimated cost of equity using the SML approach?

2. What is the estimated cost of equity using the DGM approach? 

3. What is the firm’s weighted average cost of capital using the SML estimate of the cost of equity? What about when using the DGM estimate of the cost of equity?