1. Sammy is the CEO of Company XYZ. He estimates that the risk premium should be 4.5%. Company XYZ's bonds yield 9.25%. Using the bond-yield-plus-risk-premium approach, what is the firm's cost of equity?
2. Assume Company XYZ can borrow at an interest rate of 6.5%, and its marginal federal-plus-state tax rate is 37%. What will be the after-tax cost of debt for the company?
3. Assume that in today's market, rrf = 4.25%, the market risk premium is RPM = 4%, and Company XYZ's beta is 1.02. Using the CAPM approach, what is Company XYZ's estimated cost of equity?