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%. 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? Answer: 12.3% b. What is the after-tax cost of debt? Answer: 3.9% c. What is the WACC? Answer: 11.9%. 7.12 HiFlyer Corporation currently has no debt. Its tax rate is 0.4, 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. Answer: 17.25% b. Estimate the firm''s cost of equity after the firm increases its leverage to 75% of equity. Answer: 22.2%