The CEO of FUN Corp. believes the cost of capital used in the previous question is inaccurate. You have been assigned to estimate cost of capital for FUN Corp.

• The company has a capital structure which consists of 80% long-term debt and 20% common stock.
• The companys credit rating is Ba1/BB+ (equivalent to spread of 2%). Beta of debt is 0.
• The companys common stock currently sells for $35 per share with 2.5 million shares outstanding.
• The companys marginal tax rate is 30%. Market risk premium is 5%. Risk-free rate is 5%.
• FUN Corp.s most comparable competitor is Toy Inc. who has no debt. Toy Incs equity beta is 1.4.

Answer the following questions (please show reasonings or calculations):

1. What is Toy Incs cost of capital?
2. What is FUN Corps cost of capital?