1. The Finance-is-Fun Company has 10,000 bonds outstanding. The bonds have a face value of $1,000 each. The bonds are selling at 101% of face value, have a 7% coupon rate, pay interest annually, and mature in 9 years. In addition, there are 1.25 million shares of common stock outstanding with a market price of $63 a share and a beta of 0.97. The common stock just paid a dividend of $1.20 and expects to increase those dividends by 3% annually. The firm's marginal tax rate is 35%. The expected return on the market is 11% and the risk-free rate is 3.5%.

1. What is the cost of equity based on the security market line? (10.78%)
2. What weight should be given to debt in the weighted average cost of capital computation? (11.37%)
3. If the cost of debt financing (R_D) is 4.45%, calculate the weighted average cost of capital. (9.88%)