A Killer Chocolate Bunny Company currently has $1,000,000 of 9.0% coupon bonds outstanding. The bonds pay their coupon interest semi-annually, mature in 5 years and currently quoted at 101.25. The company also has $750,000 of 7 percent preferred stock outstanding and 100,000 common shares issued and outstanding. The firm's preferred shares have a par value of $75.00 per share and the shares are currently selling for $60.00 in the market today with have no maturity date. Common shares are currently selling for $42.25 and just paid its most recent dividend of $3.25. The company has a marginal tax rate of 40 percent. The company is considering the investment in a new product line that will involve the raising of approximately $2,500,000 in capital expenditures and the firm will have $100,000 of internally generated funds available for reinvestment. You have the following observations for the company's financial instruments in the market: Debt: The firm's new bonds will be at the same risk level as the firm's existing bond issue. They will be sold at par with semi-annual payments and mature in 5 years. Preferred Shares: New preferred shares will have a par value of $50 per share and will be issued at par. Common Shares: The company has a beta of 0.82609 and the company expects to grow at a constant rate of 4 percent forever. Flotation Costs: Flotation costs for new financial securities are as follows; new preferred shares 8.0%; new debt is 3.25% and new common shares 9%. Current Market Conditions: Return on the TSX is 14% Return on Government t-bills is 2.5%

Description	Proportion
Debt	60%
Preferred Shares	10%
Common Shares	30%
Total	100%

A. The cost of using debt financing is 8.70%. B. The cost of using preferred share financing is 8.75%