Use the following information for questions in problem 4:

The capital structure of Truman industries Inc. consists of bonds in common stock equity. TI’s tax rate is 40%. The details on the various components of its capital structure are as follows:

Bond:? Type: Fixed Semi - annual coupon, non callable

? Maturity: 20 years

? Coupon Rate: 7%

? Par Value: 1000

? Current Price: $850

Common Stock:

? Current Price: $18

? Last annual dividend just paid : $2

? Expected Growth Rate of dividends: 6%

? Beta: 1.4

? Risk free rate: 3.5%

? Expected Return of the market: 11.50%

Questions:

a) What is the after -tax cost of debt of bond 1

b) Using the CAPM what is the after tax cost of Equity of the common stock of TI ?

c) Truman Capital Structure consists of 60% in bonds with remainder in common stock eq