This year, an office building has an EBIT of $1,000,000. The corporate tax rate is 0.35. You are considering buying the building using 80% of debt and the rest in equity. The unlevered beta of office REITs is 0.4 and the average D/E in the sector is 0.5. Long term bonds yield 2%, the expected inflation is 1%. Assume a risk premium of 4%. Assume a cost of debt of 3%.

1. What is the cost of equity in the investment, the WACC and the capitalization rate (assuming g=inflation)?
2. What is your estimate of the value of the office?