7-11. ABC Incorporated shares are currently trading for $32 per share. The firm has 1.13 billion shares outstanding. In addition, the market value of the firm’s outstanding debt is $2 billion. The 10-year Treasury bond rate is 6.25%. ABC has an outstanding credit record and has earned a AAA rating from the major credit-rating agencies. The current interest rate on AAA corporate bonds is 6.45%. The historical risk premium over the risk-free rate of return is 5.5 percentage points. The firm’s beta is estimated to be 1.1 and its marginal tax rate, including federal, state, and local taxes, is 40%.,a. What is the cost of equity?,b. What is the after-tax cost of debt?,c. What is the weighted average cost of capital?,Answers:,a. 12.3%,b. 3.9%,c. 11.9%,7-12. HiFlyer Corporation does not currently have any debt. Its tax rate is .4 and its unlevered beta is estimated by examining comparable companies to be 2.0. The 10-year bond rate is 6.25%, and the historical risk premium over the risk-free rate is 5.5%. Next year, HiFlyer expects to borrow up to 75% of its equity value to fund future growth.,a. Calculate the firm’s current cost of equity.,b. Estimate the firm’s cost of equity after it increases its leverage to 75% of equity.,Answers:,a. 17.25%,b. 22.2%,please show me ow to work thes problems
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