You are employed by June Industries, a Fortune 500 firm that is a major producer of chemicals and plastic goods: plastic grocery bags, styrofoam cups, and fertilizers. You are on the corporate staff as an assistant to the Vice-President of Finance. This is a position with high visibility and the opportunity for rapid advancement, providing you make the right decisions. Your boss has asked you to estimate the weighted average cost of capital for the company. Following some information about June Industries.

1. Long term debt (40,000 bonds, RM1,000 face value)
2. Common Stock 10,000,000 shares)

You check The Wall Street Journal and see that June Industries stock is currently selling for RM7.50 per share and that June Industries bonds are selling for RM889.50 per bond. These bonds have a 7.25 percent annual coupon rate, with semi-annual payments. The bonds mature in twenty years. The beta for your company is approximately equal to 1.1. The yield on a 6-month Treasury bill is 3.5 percent and the yield on a 20-year Treasury bond is 5.5 percent. The market risk premium is 6 percent. June Industries is in the 40 percent tax bracket.

Required:

1. Using the CAPM approach, what is the best estimate of the cost of equity for June Industries?