The following balance sheet extract relates to the ABC Company.

Bonds Payable $1,200,000 Common Stock $3,000,000 Preferred Shares $1,550,000 Additional Information:

The bonds are 8%, annual coupon bonds, with 9 years to maturity and are currently selling for 90% of par.

The company's common shares which have a book value of $25 per share are currently selling at $22 per share. The beta on the company's stock is 1.10

Preferred shares have a book value of $100 per share. This share is currently selling at $115 per share and carries a coupon rate of 6%.

Market Risk premium is 6 % and 4% is the risk-free rate.

Company's Tax rate is 30%

Required:

A. Determine the following for the company:

Total Market value (4 marks)

After-tax Cost of Debt (2 marks)

Cost of Common Stock (2 marks)

Cost of Preferred Stock (1 mark)

WACC (3 marks)

B. What is the best proxy for the risk-free rate when using^.the CAPM to calculate the cost of equity? Explain the reasons for your answer. (3 marks)