(a) You are given (i) The risk-free rate is 0.02, and (ii) The market risk premium is 0.06. A loan has a beta of 0.20 and pays 5% annual effective interest. If it defaults, 40% of the amount due will be paid. Calculate the default rate for this loan that yields the same cost of debt capital as CAPM.

(b) The annual effective risk-free interest rate is 0.05. For a corporate loan, the probability of default is 0.1. If a default occurs, the recovery rate on the amount owed including interest is 30%. Calculate the debt cost of capital.