In mid-2009, Rite Aid had CCC-rated,66-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 4%.Suppose the market risk premium is 6% and you believe Rite Aid's bonds have a beta of 0.37. The expected loss rate of these bonds in the event of default is 54%.

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 7.3%, while similar maturity Treasuries had a yield of 1.7%. What probability of default would you estimate now? What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009? (Round to two decimal places.)

c. 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 6%, what is Pepsico's equity cost of capital?