Refer to Exhibit 1 below.

a). What is the best estimate of the after-tax cost of debt? b). Based on the CAPM, what is the firms cost of equity? c). What is the best estimate for the weight of debt to use in calculating the firms WACC? 3 Exhibit 1 Assume that you have been hired as a consultant by Igglepiggle, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firms weighted average cost of capital. The balance sheet and some other information are provided below. Assets Current assets $ 38,000,000 Net plant, property, and equipment 101,000,000 Total assets $139,000,000

Liabilities and Equity Accounts payable $ 10,000,000 Accruals 9,000,000 Current liabilities $ 19,000,000 Long-term debt (40,000 bonds, $1,000 par value) 40,000,000

Total liabilities $ 59,000,000

Common stock (10,000,000 shares) 30,000,000 Retained earnings 50,000,000 Total shareholders' equity 80,000,000 Total liabilities and shareholders' equity $139,000,000

The stock is currently selling for $15 per share and its non-callable $1,000 par value, 20-years until maturity, 7% coupon bonds with semi-annual payments are selling for $900. The stocks beta is 1.5 and the risk-free rate is 3%. The required return on the stock market is 9%. The firm's marginal tax rate is 40%.