3) Your companys balance sheet currently shows the following:

Debt $1500 million

Equity $2500 million

Total Assets $4,000 million

Bonds have a par value of $1000, 8 years to maturity and have a coupon rate of 5.7% paid semiannually. Other bonds with similar characteristics and risk currently have a yield to maturity of 6.78%. Price of a bond is $934.15. The book value of common stock price is $45 per share. The current stock price is $32 per share in the market. Beta for your stock is 1.15 and the current risk-free return and market return are 3% and 10%, respectively. The tax rate is 35%.

a) Find the market value and cost of debt.

b) Find the market value and cost of equity.

c) Calculate the weighted average cost of capital using market values

d) Calculate the weighted average cost of capital using book values.

e) Explain the advantages and disadvantages of each weighting method.

Using the information from the previous problem, calculate the cost of equity if your book value capital structure changes to 60% debt and 40% equity. Explain in detail why the cost of equity changed the way it did.