DTX Corp. wants to estimate the cost of capital for one its divisions that manufactures circuit boards. DTX common stock has a beta of 1.2 and an optimal capital structure of 40% and 60% equity. Management has identified an appropriate pure-play which has a beta of 1.65 and a debt-to-equity ratio of 0.80.

DTX believes the optimal debt-to-equity ratio for its circuit-board division is 0.50. Assume the risk-free rate is 2% and the market risk premium is 6%. Also asume a 40% tax rate for DTX and the pure-play firm. The cost of debt for DTX is 5.0%. What is the weighted average cost of capital for the circuit-board division at DTX?

Select one:

a. 7.83%

b. 8.24%

c. 8.80%

d. 9.06%

e. none of the above