7.11 ABC Incorporated shares are currently trading for $32 per share. The firm has 1.13 billion shares outstanding.

In addition, the market value of the firm’s outstanding debt is $2 billion. The 10-year Treasury bond rate is 6.25%. ABC has an outstanding credit record and has earned a AAA rating from the major credit-rating agencies. The current interest rate on AAA corporate bonds is 6.45%. The historical risk premium over the federal, state, and local taxes, is 40%.

a. What is the cost of equity? Answer: 12.3%

b. What is the after-tax cost of debt? Answer: 3.9%

c. What is the weighted average cost of capital? Answer: 11.9%