BioCom has two outstanding bond issues. Bond 1 matures in six years, has a par value of $1,000, has a coupon rate of 7% paid semiannually, and now sells for $1,031. Bond 2 matures in sixteen years, has a par value of $1,000, has a coupon rate of 8% paid semiannually, and now sells for $1,035. The preferred stock has a par value of $50, pays a dividend of $1.50, and has a current market value of $19. The common stock sells for $35 per share and recently paid a dividend of $2.50. The company expects dividends to grow at an average annual rate of 6% for the foreseeable future. The risk-free rate is 3%, the expected rate of return on the market portfolio is 12%, BioComs beta is 1.2, and its marginal tax rate is 34%.

BioComs Capital by Percentages

Type of Capital	Percent of Book Value	Percent of Market Value
Bond 1	18%	15%
Bond 2	20%	20%
Preferred stock	20%	10%
Common stock	5%	Not available
Retained earnings	37%	Not available
Total common equity		55%

1. Compute BioComs weighted average cost of capital. Should you use book values or market values for this computation?You should show your work! Please explain your answer.

2. BioCom could sell new bonds with maturities of fifteen to twenty years at approximately the same yield as Bond 2. It would, however, incur flotation costs of $20.00 per $1,000 of par value. Estimate the effective interest rate BioCom would have to pay on a new issue of long-term debt.You should show your work!Please explain your answer.

3. Some of BioComs projects are low risk, some average risk, and some high risk. Should BioCom use the same cost of capital to evaluate all its projects, or should it adjust the discount rate to reflect different levels of risk?Please explain your answer.