XYZ Hospital is a not-for-profit hospital with an initial capitalization of $10 million of equity funds. XYZ is considering issuing bonds to supplement its capitalization. Their investment banker has suggested that, based on industry standards a mix of 50% debt and 50% equity would be viewed favorably by potential investors. The stakeholders that supplied the equity capital also advised XYZ that they are expecting an 8% return on their investment on a year-to-year basis. The investment banker advised XYZ that if the bonds were issued into the current market interest rates of 4% - 6% could be expected. The investment banker also advised XYZ that had they been hired to solicit the equity funds, their investor pool would have expected a 5% return. Answer this and the following questions based on the above situation.

Question: Based on the above:

If XYZ issues $10 million in bonds at an interest rate of 6% its cost of capital will be:

A. 5.5%

B. 6%

C. 7%

D. 8%