To calculate the firm's levered cost of capital (also known as the WACC or weighted average cost of capital), we can use the Modigliani-Miller Proposition II with Taxes, which states:

$r_L = r_U + \frac{D}{E} \times (r_U - r_D) \times (1 - T_C)$

Where:

• $r_L$ = Levered cost of capital (WACC)
• $r_U$ = Unlevered cost of capital (12.46%)
• $r_D$ = Cost of debt (6.68%)
• $D/E$ = Debt-to-equity ratio (based on 35% debt, so D/E = 0.35 / 0.65)
• $T_C$ = Tax rate (35%)

First, we calculate the Debt-to-Equity ratio $\frac{D}{E}$:

$\frac{D}{E} = \frac{0.35}{0.65} = 0.5385$

Now, applying the values to the formula for the levered cost of capital:

$r_L = 12.46\% + 0.5385 \times (12.46\% - 6.68\%) \times (1 - 0.35)$

Let's solve for $r_L$.The firm's levered cost of capital (WACC) is 14.48%. Thus, the correct answer is:

14.48%.

Would you like any further details or explanations?

Here are some related questions for further exploration:

1. How does the tax shield benefit impact the WACC in this scenario?
2. How would a higher debt percentage affect the levered cost of capital?
3. What would happen to the WACC if the cost of debt increased?
4. How would the WACC change if there were no taxes?
5. How does the Modigliani-Miller theorem relate to the firm's capital structure?

Tip: Increasing debt can lower the cost of capital due to the tax shield, but only to a certain extent before the cost of financial distress outweighs the benefits.