A firm has issued $20 million in long-term bonds that now have 10 years remaining until

maturity. The bonds carry an 8% annual coupon but are selling in the market for $877.10.

The firm also has $45 million in market value of common stock. For cost of capital

purposes,

1. What portion of the firm is debt financed and what is the after-tax cost of debt,

if the tax rate is 35%?

2. In computing the cost of capital, which sources of capital should be considered?