Vandelay Industries Incorporated (VII) is a publicly traded company with 25 mln shares outstanding which are currently trading at a price of $12.25 per share. The correlation between the returns on the company's stock and those of the S&P/TSX Composite Index is0.65andthevolatilityofVII'sstockreturnsis40%. VIIalsohas120,000couponbonds outstanding. The bonds have a 3.5% coupon rate (paid annually), 16 years to maturity, and a default spread of 375 basis points. Assume VII's marginal tax rate is 32%. a. What are the weights of debt and equity in VII's capital structure? b. What is VII's cost of equity? c. What is VII's weighted average cost of equity?

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