In mid-2009, Rite Aid had CCC-rated, 6-year bonds outstanding with a yield to maturity of 17.3%. At thetime, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 5% and you believe Rite Aid's bonds have a beta of 0.31. The expected loss rate of these bonds in the event of default is 60%.

a. What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009?

b. In mid-2015, Rite-Aid's bonds had a yield of 7.1%, while similar maturity Treasuries had a yield of 1.5%. What probability of default would you estimate now?

Suppose Pepsico's stock has a beta of 0.57. If the risk-free rate is 3% and the expected return of the market portfolio is 8%, what is Pepsico's equity cost of capital?

Pepsico's equity cost of capital is

(Round to two decimal places.)

KMS Corporation has assets with a market value of $509 million, $32 million of which are cash. It has debt of $171 million, and 16 million shares outstanding. Assume perfect capital markets.

a. What is its current stock price?

b. If KMS distributes $32 million as a dividend, what will its share price be after the dividend is paid?

c. If instead, KMS distributes $32 million as a share repurchase, what will its share price be once the shares are repurchased?

d. What will its new market debt-equity ratio be after either transaction?