1. Epson has one bond outstanding with a yield to maturity of 6% and a coupon rate of 8%. The company has no preferred stock. Epson's beta is 0.7, the risk-free rate is 2.8% and the expected market risk premium is 6%.

Epson has a target debt/equity ratio of 0.3 and a marginal tax rate of 34%.

a. What is Epson's (pre-tax) cost of debt?

b. What is Epson's cost of equity?

c. What is Epson's capital structure weight for equity?

d. What is Epson's weighted average cost of capital?

2. Idaho Engineering Inc. has a target capital structure of 23% debt, 10% preferred stock and 67% common stock. The interest rate on new debt is 5.9%, the yield on preferred stock is 8% and the cost of retained earnings is 11%. The firm will not be issuing any new stock, and the tax rate is 39%.

a. What is the company's weighted average cost of capital?