The following balance sheet extract relates to the Allied Insurance Company

Bonds Payable $1,000,000

Common Stock $3,000,000

Additional Information: 1. The bonds are 8%, annual coupon bonds, with 9 years to maturity and are currently selling for 95% of par. 2. The companys common shares which have a book value of $25 per share are currently selling at $20 per share. 3. The company has an equity beta of 1.5 and the current Treasury bill rate is 3.5%. The market risk premium is 1.5% 4. The companys tax rate is 30%.

A. Calculate Allieds cost of debt.

B. Calculate Allieds cost of equity.

C. Calculate Allieds market value weighted average cost of capital.

D. Explain why the cost of debt is cheaper than the cost of equity.