According to CAPM,
Cost of Equity = Risk Free Rate + Beta*Equity Risk Premium
a)
Risk Free Rate = 4.28%
Beta = 1.25
Risk Premium = 3.5%
Cost of Equity = 4.28% + 1.25*3.5% = 8.66%
b) Yield = 5.125%
Taxes = 25%
C)
>>> Assumption that Risk Premium is 3.5%
Cost of Debt = 5.125% * (1-25%) = 3.84%
At 75% Equity and 25% Debt
Weighted Average Cost of Capital (WaCC) = .75*8.66% + .25*3.84% = 7.45%
>>> Assumption that Risk Premium is 7%
Cost of Equity = 4.28% + 1.25*7% = 13.03%
At 75% Equity and 25% Debt
Weighted Average Cost of Capital (WaCC) = .75*13.03% + .25*3.84% = 10.73%