No Growth Incorporated had operating income before interest and taxes in 2017 of $220 million. The firm is expected to generate this level of operating income indefinitely. The firm had depreciation expense of $10 million that same year. Capital spending totaled $20 million during 2017. At the end of 2016 and 2017, working capital totaled $70 and $80 million, respectively. The firms combined marginal state, local, and federal 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 No Growth is 7%. The historical risk premium for stocks over the risk free rate of return is 5.5%. No Growths beta was estimated to be 1.0. The firm had 2,500,000 common shares outstanding at the end of 2017. No Growths target debt to total capital ratio is 30%.7. Estimate the value of the firm (i.e., includes the value of equity and debt) at the end of 2017, assuming that it will generate the value of free cash flow estimated in (a) indefinitely. (Answer must be in million dollars, but write the number only.) Answer: $1300.8 million COE = .05 + 1.0(.055) = 10.5 COC = .70 x .105 + .07 x (1-.4) x .3 = .0735 + .0126 = .0861 PV = 112,000,000/.0861 = 1,300,813,008 This is the solution to this problem, but I am confused as to where they got the numbers from especially the .0126.