Galaxy Air has 5 million debt and 5 million equity. The costs of debt and equity are 7.5% and 15%, respectively. The company has an investment opportunity. The investment project support only 40% debt versus 50% for the company overall (the cost of debt is fixed). Assume the tax rate is 21%.

a. What is the weighted average cost of capital if the company invests in this project?

b. Suppose its debt and equity betas are 0.15 and 1.4, respectively. The risk-free rate is 6% and the market return is 12.5%. What is the cost of equity at the new financing weights 40/60 D/E ratio?