1.Following information for Golden Fleece Financial:

Long-term debt outstanding

$380,000

Bond rating

AAA

Current yield to maturity (r_D):

7%

Number of shares of common stock:

14,000

Price per share:

$50.80

Book value per share:

$33.00

Expected rate of return on stock (r_E):

14%

2.Calculate Golden Fleece's unlevered (all-equity) cost of capital. Assume continuous leverage rebalancing.

a.

12.40%

b.

11.12%

c.

11.56%

d.

14.50%