Question 11, Homework 30:

A corporation has 1 million shares outstanding, and the stock is currently trading at $10 per share. The company has two different bonds outstanding. First, it has 5000 zero coupon bonds outstanding. Each zero coupon bond has a face value of $1000, will mature in 5 years, and is currently priced at 65% of face value. Second, the company has 5000 coupon paying bonds outstanding. Each coupon paying bond is currently priced at $940.00, and the YTM is 11%. You have decided to calculate the cost of equity using the SML equation. You have estimated that the risk-free rate is 5%, and the expected rate of return on the market portfolio is 10%. You also have estimated that the equity beta of the company is 2.5. Finally, the company faces a tax rate of 30%. Using the information given, calculate the cost of capital (WACC) of the corporation