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Suppose a firm has bonds trading at an 8.5% yield and the typical risk premium over bond yield for an average company (beta = 1.0)

Suppose a firm has bonds trading at an 8.5% yield and the typical risk premium over bond yield for an average company (beta = 1.0) is 4%. The firm is believed to have above-average risk so 5% is a better estimate of its risk premium over bond yield. What is the cost of equity?

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