1. Florida Electric Company (FEC) uses only debt and equity. It can borrow unlimited amounts at an interest rate of 8 percent as long as it finances at its target capital structure, which calls for 40 percent debt and 60 percent common equity. Its last dividend was $3, its expected constant growth rate is 3 percent, its stock sells at a price of $35, and new stock would net the company $30 per share after flotation costs. FECs marginal tax rate is 21 percent, and it expects to have $110 million of retained earnings this year. Two projects are available: Project A has a cost of $200 million and an internal rate of return of 13 percent, while Project B has a cost of $125 million and an internal rate of return of 8 percent.

All of the companys potential projects are equally risky.

1. What is the cost of FECs retained earnings?
2. What is FECs cost of equity from newly issued stock?
3. What is FECs marginal cost of capitalthat is, what WACC cost rate should it use to evaluate capital budgeting projects (these two projects plus any others that might arise during the year, provided the cost of capital schedule remains as it is currently)?