D1.

Greenberg Corp. is considering opening a subsidiary to expand its operations. To evaluate the proposal, the company needs to calculate its cost of capital. You've collected the following information:

The firm has one bond outstanding with a coupon rate of 8%, paid semi-annually, 10 years to maturity and a current price of $1,071.06, implying a yield to maturity of 7%.

The firm's preferred stock pays an annual dividend of $1.55 forever, and each share is currently worth $86.

New bonds and preferred stock would be issued by private placement, largely eliminating flotation costs.

Greenberg's beta is 0.8, the yield on Treasury bonds is is 1.9% and the expected market risk premium is 6%.

The current stock price is $17.51. The firm has just paid an annual dividend of $0.51, which is expected to grow by 3% per year.

The firm uses a risk premium of 4% for the bond-yield-plus-risk-premium approach.

New equity would come from retained earnings, thus eliminating flotation costs.

The firm has marginal tax rate of 34%.

The company wants to maintain is current capital structure, which is 50% equity, 10% preferred stock and 40% debt.

What is the cost of equity using the CAPM?

What is the company's weighted average cost of capital, using the CAPM to find the cost of equity?