For the Bilbo corporation below.

• Debt: 10,000 5% coupon bonds outstanding, priced at 100% of the par value, with 15 years to maturity. These bonds pay interest annually.
• Preferred Stock: 50,000 shares of preferred stock with a dividend of $2.60 per share. It is currently selling at $[d] per share.
• Common Stock: 200,000 shares common stock selling for $50 per share. The stock has a beta of 1.1
• Market: The expected return on the market is 8%, and the risk-free rate of return is 3%.
• tax bracket = 20%

What is the cost of debt?

7%

8.5%

5%

4.5%