(rE and WACC) Consider the following data concerning Abby Company:

a. Calculate Abby’s cost of equity (rE).

b. Find Abby’s WACC.

c. Abby’s stock is not currently listed on a stock exchange. Suppose Abby issues all its stock in an initial public offering (IPO). After the IPO, the company has 3,500,000 shares, worth $2.5 each. What is its WACC after the IPO?

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1 A B Abby Company WACC 2 E() 10% 3 Cost of debt, rp 8% 4 Corporate tax rate, Tc 30% 5 Cov(AbbyM) 0.13 6 Debt, D 1,500,000 7 Var(M) 0.11 8 Risk-free rate, r 3% 9 Equity, E 3,000,000 C