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

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