Answer each of the following questions:

a. ABC Ltd has 35,000 bonds outstanding that trade at par value (each bond has a par value of $1,000). Companies with similar characteristics have their bonds trading at a yield of 4.5%. The company also has 5 million shares of common stock outstanding. The stock has a beta of 1.3 and sells for $25 a share. The risk free rate is 1.5% and the market risk premium is 6%. The companys tax rate is 30%. What is the companys weighted average cost of capital?

b. Suppose ABC Ltd now wishes to change its capital structure to have a weighted average cost of capital of 6.5%. What equity ratio (equity to total firm value) is needed for the firm to achieve its targeted weighted average cost of capital?