Ponion Boy Inc. (PB) has a total market value of $400 million, consisting of 12 million shares of common stock selling for $25 per share and $100 million of 8 percent perpetual bonds currently selling at par. PB pays out all earnings as dividends, and its marginal tax rate is 35 percent. The firms earnings before interest and taxes (EBIT) are $45 million. Management is considering increasing PBs debt until its capital structure has 65 percent debt, based on market values. The additional funds will be used to repurchase stock at the new equilibrium price. At the new capital structure, PBs cost of debt is estimated at 13.5 percent and its cost of equity is estimated to be 14.85 percent.

5. What is PBs weighted average cost of capital at its current debt level of $100 million?

a. 7.32%

b. 9.51%

c. 10.52%

d. 8.75%

e. 12.25%