South Sea Limited, a private firm in the holiday gift business, is considering a new project. The company currently has a target debt-equity ratio of 40%, while the industry target debt- equity ratio is 35%. The industry average beta is 1.2. The market rate of return is 12%, and the risk free rate is 5%. Assume all companies in the holiday gift business can issue debt at the risk free rate. The corporate tax rate is 40%. A new project is proposed for the CEO to consider and the project will be financed at South Sea's target debt-equity ratio.

You can use the Hamada equation: bL= bU[1 + (1-T)(D/E)]

Required:

1. Calculate the unlevered beta of the industry.
2. Calculate the levered beta using South Sea's target debt-equity ratio.
3. Determine the weighted average cost of capital for the project.