3. M&M Proposition I states that in perfect capital markets (mainly no taxes and no financial distress costs) the value of a company will remain unchanged and its WACC will remain equal to its required rate of return on assets (which is the opportunity cost of capital for the company), irrespective of its capital structure. ABC, Inc. is currently an all-equity firm with RE = 18% and RD = 4%. The company wants to borrow an amount of debt whose market value is equal to 35% of the market value of its assets (and thus use the proceeds to buy back 35% of its equity).

c. Calculate the required rate of return on equity for the firm after the borrowing.

d. Calculate the weighted average cost of capital of the firm after the borrowing.