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

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: LSB’s 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?

Bank Loan
Current Balance	$8,000,000
Payments	$1,750,000
Term (years)	5
Equity
Market Risk Premium	7.50%
beta	1.5
Company
Debt Ratio	66.67%
Equity Ratio	33.33%
Tax Rate	40%
Part a: Return Debt (i.e., Bank Loan)		Show (i.e., link to) final answer here.
Part b: Return on Equity		Show (i.e., link to) final answer here.
Part c: Project Discount Rate		Show (i.e., link to) final answer here.