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You have been asked to analyze Stevens Steel, a small steel company. The company has supplied you with the following information:

There are 100 million shares outstanding, trading at $ 10 a share

The firm has debt outstanding of $ 500 million, in market value terms.

The beta for the firm currently is 1.04, the risk free rate is 5% and the market risk premium is 5.5%.

The firms current bond rating is A; the default spread for A rated bonds is 1.5%.

The marginal tax rate is 40%.

Estimate the current cost of capital for Stevens Steel.

a.

8.99%

b.

6.55%

c.

3.33%

d.

8.45%