The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below.

Assets

Current assets

$28,000,000

Net plant, property, and equipment

101,000,000

Total assets

$129,000,000

Liabilities and Equity

Long-term debt (30,000 bonds, $1,000 par value)

30,000,000

Common stock (10,000,000 shares)

20,000,000

Total liabilities and shareholders' equity

$129,000,000

The stock is currently selling for $10.25 per share, and its noncallable $1,000 par value, 20-year, 5.25% bonds with semiannual payments are selling for $975.00. The beta is 1.25, the yield on a 6-month Treasury bill is 1.50%, and the yield on a 20-year Treasury bond is 2.50%. The required return on the stock market is 9.50%, but the market has had an average annual return of 10.50% during the past 5 years. The firm's tax rate is 30%.

1.What is the before tax cost of debt (Yield to Maturity), r_D?

2.What is the after tax cost of debt?

3.What is the cost of equity (r_E)?