Question
In: Finance
Suppose that firm A is considering entering a business similar to firm B, a relatively small...
Suppose that firm A is considering entering a business similar to firm B, a relatively small firm in a single line of business. Firm A is currently financed with 60% debt and 40% equity. Firm B, the pure-play firm, has a β of 0.95 and is financed with 40% debt and 60% equity. Firm B’s marginal tax rate is 30% and firm A’s marginal tax rate is 25%. Assume the riskless rate is 2% and the market return is 8%.
1) According to the CAPM, the market risk premium is _____________ percent?
Solutions
Expert Solution
CAPM equation for Market risk Premium = Market return - Risk Free rate
Market return =8%
Risk Free rate = 2%
So Market risk Premium = 8%-2%
=6%
Market risk Premium is 6%
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