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

The market value of its debt is $2 billion. The 10-year Treasury bond rate is 6.25%. ABC 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 risk-free rate of return is 5.5%. The firm’s beta is estimated to be 1.1, and its marginal tax rate, including federal, state, and local taxes, is 40%. (Appendix)

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%