The tax rate for The Ithaca Corporation is 0.4. The following table has been prepared for the president of the firm.

Only bond interest is deductible for income taxes. The firm has a capital structure of 0.4 debt, 0.1 preferred stock, and 0.5 common stock. Assume that the U.S. Internal Revenue Code applies.

a. Compute the weighted average cost of capital of the firm, with the given capital structure.

b. Compute the before-tax return for an investor who splits her investment in the company in the same proportion as the sources of capital.

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Bonds Preferred stock Common stock Before-Tax Cost After-Tax Cost 0.10 0.12 0.20 0.06 0.072 0.12