Jackson expects its earnings (and its dividends) to continue to grow at their historical rate of 5% per year for the indefinite future. The current risk-free rate is 7.8% and the expected return on the S&P 500 Index is 16.25%. Jackson's appropriate levered equity beta is 0.80. Their bonds are currently trading at $1000 per bond, have a par value of $1000, an annual coupon rate of 12%, and a term to maturity of 12 years. Thus, the YTM on this bond is consistent with the current Debt Risk Premium between the S&P 500 Composite and long-term, high-grade bonds of 4.2%. The firm's tax rate is 34%.

Calculate cost of debt