Problem:
The common stock of a company has a beta of 0.90. The Treasury bill rate (rrf) is 4 percent, and the market risk premium is estimated to be 8 percent (RPm = 8%). This firm's capital structure is 30 percent debt, paying a 5 percent interest rate (rd = 5%), and 70 percent equity.
Required:
Question 1: What is this firm's cost of equity capital?
Question 2: What is the weighted average cost of capital (WACC)? Assume the company has a 40 percent marginal tax rate.
Note: Please show how to work it out.