The company XYZ has a stock price of $10 and 100,000 outstanding shares. The stock beta is 1.5. The market value of XYZs debt is $600,000. The debt consists of bonds with an annual yield to maturity (YTM) of 7%. The probability of default is 5% and in case of default, the expected loss rate is 40%. The corporate tax rate is 20%. In addition, assume that the expected market risk premium is 5% and that the risk-free interest rate is 0.5% per year.

Question: Compute the cost of equity and cost of debt?