3. If the risk-free rate is 2.50%, the stock is 3/4 times as risky as the market, and the expected return on the market is 7%, what is the cost of equity? RISK-FREE RATE TIMES AVERAGE MARKET RISK EXPECTED RETURN ON MARKET 2.50% 0.75 7.00% Re + 4. If the risk-free rate is 2%, the stock is one and one-half times as risky as the market on average and the market risk premium is 6%, what is the cost of equity? RISK-FREE RATE 2.00% TIMES AVERAGE MARKET RISK MARKET RISK PREMIUM 6.00% Re B 5. A company has $1,000 par value bonds with a coupon rate of 7% which will nature in 12 years and is selling for $975. What is the before-tax cost of debt for this firm? If the firm's tax rate is 30%, what is its after-tax cost of debt? B t PAR VALUE COUPON RATE YEARS TO MATURITY PRICE OF BONDS 5 6 7 3 TAX RATE Rd AFTER-TAX COST OF DEBT