You want to calculate the capital structure of a given company that has 40 million shares sold at $50 each. The company has an estimated beta of 1.02 and you know that the market risk premium and the risk free rate are 9% and 5% respectively. Also, you know that the company has $1 billion in bonds (face value) with a current price quote of 110%. The coupon rate of the bonds is 10% semi-annual with 20 years to maturity and a yield to maturity of 12%. The tax rate of the company was 40% but now is 38%.

a. Calculate the cost of equity and the cost of debt of the company. (10 marks)

b. Determine the weighted average cost of capital (WACC) of the company. (20 marks)

c. The company is now facing a project which has a risk higher than that of the company as a whole. Discuss whether you would suggest the company to use the WACC in (b) as a hurdle rate to make the decision. If not, please suggest one method for the company and discuss it briefly.