As a newly hired financial analyst, your first job at VersaLife Corporation is to calculate the company's cost of capital. The present capital structure, which is considered optimal, is as follows:

	Market Value
Debt	$80 million
Preferred Stock	$10 million
Common Equity	$110 million
Total Capital	$200 million

If VersaLife Corporation issues new debt, then the bond market expects a yield of 7.5%. Preferred stock is trading for $96, has a $100 par value and pays an annual dividend of 8% (the next dividend is due in one year). Common equity has a beta of 1.20, the market risk premium is 5%, and the

riskfree

rate is 3%. If the firm's tax rate is 40%, what is the weighted average cost of capital? Round answers to the nearest tenth.

A.

7.2%

B.

8.2%

C.

8.5%

D.

7.5%

E.

9.0%