1. Rocky Mountain Inc. is all-equity-financed. The expected rate of return on the companys shares is 15%.

A. What is the opportunity cost of capital for an average-risk Rocky Mountain investment?

B. Suppose the company issues debt, repurchases shares, and moves to a 40% debt-to-value ratio (D/V = 0.4). What will be the companys weighted-average cost of capital at the new capital structure? The borrowing rate is 10.25% and the tax rate is 21%.