Lox, Stock and Bagel Company (LSB) is determining its cost of capital. It uses a risk free, medium term bank loan and equity financing.

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Part a: The current balance on the bank loan is $8,000,000. It is paid off in equal annual installments of $1,750,000 over 5 years. What return is the bank demanding on the loan?

Part b: The market risk premium is 7.5% and LSB's equity beta is 1.5. What return should equity holders demand on LSB's equity?

Part c: LSBs marginal tax rate is 40% and they finance 2/3 of their company with debt and 1/3 with equity. What rate should LSB use to discount projects using free cash flows while including the tax shelter of debt in one step?