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 firms 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 risk-free rate of return is 5.5%. The firms beta is estimated to be 1.1, and its marginal tax rate, including 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 WACC? Answer: 11.9%.