Example $7$:

The capital structure of Smog Inc. consists of:

$8\%15-$year Bonds $($Semi$-$annual$)$ $$30$ M

Common stocks $($$$10$ par$)$ $$20$ M

Retained earnings $$22$ M

Total capital $$72$ M

Additional Information

$1)$ The current market price of a bond is $$816\mathrm{.}67$

$2)$ Smog$$s common stock sells at $$22\mathrm{.}75$ each

$3)$ The market portfolio return is $11\%.$ Interest rate on treasury bonds is $4\%$ and beta is $1\mathrm{.}53$

$4)$ The company wants to borrow more debt which will increase the gearing $($debt to equity ratio$)$ to $1$:$1$ but will not affect the stock price due to increased tax shield. Tax rate is $30\%.$

Required

a$)$ Compute the capital structure weights

b$)$ What is the current cost of equity, Ke and cost of debt, Kd$(1-$T$)?$

c$)$ Compute WACC