I need help with B, which is bolded at the bottom. The answer for A is given to help with problem B. Thank you.

A) Lam Research Corporation has 5 bonds outstanding rated AAA. Each bond has a face value of $1,000, pays an annual coupon payment of $45, matures in 6 years, and trades at a price of $1,026. Lam has no preferred stock outstanding but does have 2,000 shares of stock outstanding. The stock trades at a price of $7 per share. Lam's beta is 1.19. The risk-free rate is 1.9% and the expected return on the market is 10.25%. The corporate tax rate is 21%. Given this information, what is Lam's weighted average cost of capital?

ANSWER: Market value of debt = 5,000,000 * 1026 = $5,130,000,000

Market value of common stock = 2,000 * 7= $14,000

Total market value = 5,130,000,000 + 14,000 = $5,130,014,000

Yield to maturity = 4.00396%

Keys to use in a financial calculator:

FV 1000

PV -1026

PMT 45

N 6

CPT I/Y

Cost of equity = Risk free rate + beta(market return - risk free rate)

Cost of equity = 1.9% + 1.19(10.25% - 1.9%)

Cost of equity = 1.9% + 9.9365%

Cost of equity = 11.8365%

weighted average cost of capital (WACC) = Weights of debt * after tax cost of debt + weight of equity * cost of equity

weighted average cost of capital (WACC) = (5,130,000,000 / 5,130,014,000)*0.0400396*(1 - 0.21) + (14,000 / 5,130,014,000)*0.118365

weighted average cost of capital (WACC) = 0.03163 + 0

weighted average cost of capital (WACC) = 0.03163 or 3.16%

B) Lam Research Corporation has just announced that their debt has been downgraded and is now rated CCC. This news has made the price of Lam's bonds drop to $500. Historically, CCC rated debt defaults 12.2% of the time. If Lam defaults on their debt, bond holders can expect to lose $0.50 for each dollar invested. Given no other changes regarding Lam's debt from the previous question, what is the cost of Lam's debt now?