Consider the following information concerning Pacific Stars Inc.'s capital structure:

- The company has 80,000 shares of common stock outstanding at a current market price of $20 per share. The stock has s beta of 1.2. The market risk premium is 6% and the risk-free rate is 3%.

- The company has 2,000 bonds outstanding, with 6% coupon and 20 years to maturity. The bond is currently selling for $1,103.8, with a yield-to-maturity of 5%.

- The tax rate for the company is 20%.

(a) What is the cost of equity for Pacific Stars? (5 marks)

(b) What is the weighted average cost of capital (WACC) for Pacific Stars? (10 marks)

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