. Entertainment Corporation is considering a project for the coming year that will require an investment cost of P100 Mln. The company plans to finance the project by a combination of debt and equity, as follows:

Issue P20 Mln of 10-year bonds at a price of 102, with an interest rate of 10% and flotation cost of 3% of par.

Use P80 Mln of funds generated from earnings retained in the business.

The expected market rate of return is 14%. The current rate of treasury bills is 8%. The beta coefficient for Entertainment Corporation is 1.2. The corporate income tax rate is 32%.

A.What is the effective rate of interest of the bonds?

B.What is the after-tax effective cost of bonds?

C.Using the Capital Asset Pricing Model (CAPM), what is the cost of equity capital for Entertainment Corporation?

D.Assume that the after-tax cost of debt is 7% and the cost of equity capital is 15%, what is the weighted average cost of capital (WACC) for Entertainment Corporation's project?