MM proposed

RS = RA + (1 TC)*(RA RD)*D/S

For required rate of return ln equity (rS) as a function of firms leverage. Suppose MM is right and asset return rA = 8%; corporate tax rate TC = 40%; cost of debt rD = 2%, andassume they are constant. If the firm uses 75% leverage , what is the firms WACC?

1. 9.8%
2. 12.8%
3. 5.6%
4. 3.575%
5. None of the above