Rivers Corp. has a tax rate of 40%. Rivers debt consists of $200 million of bonds that have a yield to maturity of 12%. Rivers Corp. has 10 million shares of common stock outstanding, currently selling at a price of $8 per share. Rivers Corp. stock has a beta of 0.85, the current risk-free rate is 3%, and the expected risk premium on the overall market portfolio is 6.5%.

4. What is Rivers Corp. cost of equity?

a. 8.525%

b. 6.416%

c. 6.805%

d. 7.788%