ABC had operating income before interest and taxes in 2018 of $220 million. The firm had depreciation expense of $10 million that same year. Capital spending totaled $20 million during 2018. At the end of 2017 and 2018, working capital totaled $70 and $80 million, respectively. The firm's combined tax rate was 40% and its debt outstanding had a market value of $1.2 billion. The 10-year Treasury bond rate is 5% and the borrowing rate for companies exhibiting levels of creditworthiness similar to ABC is 7%. The historical risk premium for stocks over the risk free rate of return is 5.5%. ABC's beta was estimated to be 1.0 and ABC's target debt to total capital ratio is 30%.

a. Estimate free cash flow to the firm in 2018. (10 Points)

b. Estimate the firm's cost of capital. (10 Points)