Burgundy plc is financed through bonds and ordinary shares. The bonds were issued five years ago at a par value of 100 (total funds raised 5m). They carry an annual coupon of 10%, are due to be redeemed in four years and are currently trading at 105. The company's shares have a market value of 4m, the return on risk-free government securities is 8% and the risk premium for an average-risk share has been 5%. Burgundy's shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium - this is 0.85. The corporate tax rate is 30%. Burgundy has a net asset figure of 3.5m showing in its balance sheet. (a) Calculate the WACC of the firm. (b) (i) Explain the term 'the cost of capital'. (ii) Explain how you might calculate the cost of equity capital. (iii) Why can we not always take the coupon rate on a bond issued years ago as the cost of bond capital?