Wal-Mart’s equity beta is 1.2, its debt-to-equity ratio is 0.4, and it borrows at the risk-free rate of 6%. The corporate tax rate is 34%. The expected return on the market portfolio is 12%. What discount rate should Walmart use to determine the value of an expansion of its current operations?
a. the return on the market, 12%, because Walmart is such a large fraction of the market portfolio
b. the required rate of return on its equity
c. the weighted average cost of capital
d. the risk-free yield on debt, 6%, because Walmart is so well-known and predictable that its expected cash flows are risk-free