ABC Incorporated shares are currently trading for $30 per share. The firm has 1.4 billion shares outstanding. In addition, the market value of the firm’s outstanding debt is $2.3 billion. The 10-year Treasury bond rate is 6.45%. ABC has an outstanding credit record and has earned an AAA rating from the major credit rating agencies. The current interest rate on AAA corporate bonds is 6.75%. The historical risk premium for stocks over the risk-free rate of return is 5.2 percentage points. The firm’s beta is estimated to be 1.2 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 cost of capital?