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Pizza Palace has a cost of equity of 15.3 percent and an unlevered cost of capital of 11.8 percent. The company has $22,000 in debt that is selling at par value. The levered value of the firm is $41,000. Assume zero tax rate and no default. What is the cost of debt? ANSWER: Apply the M\&M Proposition 2: RE=RU+ED(RURD)RE=0.153=0.118+$22,000/($41,000$22,000)(0.118RD);RD=8.8percent