The standard deviation of returns on ABC Corporation is 25% per year. The correlation coefficient between returns on ABC and the returns on the market portfolio is 0.65. The risk free rate is currently equal to 1% and the expected return on the market portfolio is 10%. The standard deviation of the market portfolio is 15%.

1. Calculate ABCs cost of equity using the capital asset pricing model (CAPM).
2. Assuming a 21% tax rate, calculate ABCs weighted average cost of capital. The ABC Corporation can borrow at 7%. The debt constitutes 40% of its assets.

1. Please type all your solutions into this file. The detailed solution to each question should follow the question itself.
2. This is NOT a multiple-choice exam. To receive a good grade, you must show your work and write solutions in detail, including:
   • a. Providing formulas in symbols. Formulas are those used in the lecture notes and the textbook. Excel or Financial Calculator formulas are NOT appropriate substitutes.
   • b. Illustrating how you plug numbers, given in each question, into these formulas.
   • c. Writing a short verbal summary at the end of each problem

Draw timelines and graphs to illustrate your answers.

You can use Excel for calculations. (BUT IT MUST BE DONE IN WORD)