McGraw Hill publishers has 200,000 shares of common stock outstanding with a par value of 1.00 per share. The current share price is 4 per share. The firm has outstanding debt with a par value of 0.6 million, which is selling at 75% of par. The risk-free rate of interest is 5% and the required return on the firms debt is 10%. The risk premium on the market is 8% and the firm has an equity beta of 1.5. The corporation tax rate is 20%. Assume that debt payments are tax deductible. What is McGraw Hills (i) cost of equity capital and (ii) WACC?

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a

(i) 13.6% and (ii) 13.76%

b

(i) 17% and (ii) 11.58%

c

(i) 13.6% and (ii) 11.58%

d

(i) 17% and (ii) 13.76%

e

None of the above