As the CFO of Moonlimited, you are calculating the cost of capital for Moonlimiteds projects. Moonlimited has 4,000 bonds outstanding that mature in 20 years with a face value of $1,000 each. Each bond is traded at $1,250, with the effective pre-tax cost of debt of 9.5%. Moonlimited has 120,000 preferred shares outstanding. Each preferred share pays a $3.4 dividend and can be sold for $25. The firms tax rate is 25%. Moonlimited is considering a project that requires an initial investment of $3 million. You estimate that the projects free cash flows will be $0.32 million per year in perpetuity. You consider the after-tax weighted average cost of capital as the proper discount rate to evaluate this project.

(b) What is the firms weighted average cost of capital (WACC)? Explain. (2 marks)