1. Billick Brothers is estimating its WACC. The company has collected the following information:

• Its capital structure consists of 40 percent debt and 60 percent common equity.
• The company has 20-year bonds outstanding with a 9 percent annual coupon that are trading at par.
• The companys tax rate is 40 percent.
• The risk-free rate is 5.5 percent.
• The market risk premium is 5 percent.
• The stocks beta is 1.4.

What is the companys WACC?

1. 5.88%
2. 8.94%
3. 9.66%
4. 10.26%
5. None of the above

The answer to this problem is 9.66%. I am confused on the formula for expected return. The formula is Re=Rf+B(Rm-Rf). But when I plug in all the numbers into this equation I get .048 = .055 + 1.4(.05 - .055) which gives the incorrect answer when solving for WACC. However, by not subtracting the Rf: .055 + 1.4(.05) I get .125. When I plug that into the WACC formula I get the correct answer of 9.66%. In summary, I don't know why the Rf is not subtracted when calculating Re for this problem. Please explain why and what bigger picture I'm missing here.