Cost of equity (SML approach): rs = .07 + 1.2 (.14 - .07) = .07 + .084 = .154 Cost of debt: The YTM on the debt is 10.25% before taxes If a firm uses its WACC to make accept/reject decisions for all types of projects, it will have a tendency toward incorrectly accepting risky projects and incorrectly rejecting less risky projects. What is the equity Beta of a firm with no debt? Assets Liabilities & O.E. Notational equivalence: What is Beta of a portfolio comprising the RHS?