Problem:
A firm has $2 million of capital needs. The firm has noticed that the current yield to maturity on its bonds is 9.5%, and its stock beta is 1.2. Currently, the expected return on the S&P 500 stocks is 12%, and the 90-day T-bill rate is 5%. The firm's target capital structure is 40% debt and 60% equity. The firm's marginal tax rate is 28%
Q1. What is the cost of debt?
Q2. What is the cost of equity?
Q3. What is the cost of capital for the $2 million?