The market value of NPU Ice Creamery equity is $8 million and the market value

of its debt is $6 million, with book value of debt at $2 million and book value of

equity at $2.5 million. The CFO estimates that the beta of the stock current is 1.43

and that the expected risk premium on the market is 8%. The Treasury bill rate is

3%. The coupon rate on the companys debt is 5% and the Yield to Maturity is

5.5%.

Requirements:

a) What is the required rate of return on NPU Ice Creamery stock?

b) Estimate the Weighted Average Cost of Capital, assume a 40% tax rate.