Question 1 (total of 20 marks): A company has:

- A target debt-to-equity ratio of 1:3.

- A beta on levered equity of 1.5.

- Existing bonds which pay a coupon of 10% and yield 8%.

- A corporate tax rate of 30%.

- The risk free rate is 5% and the market rate of return is 10%.

All rates are effective annual rates. Assume a classical tax system.

Calculate the companys pre-tax WACC (sometimes called the opportunity cost of capital, or the required return on assets, ).