Booher Book Stores has a beta of 0.5. The yield on a 3-month T-bill is 5% and the yield on a 10-year T-bond is 7%.

FIN - 650 --- Problem 9-06 (Cost of Equity: CAPM)

Booher Book Stores has a beta of 0.5. The yield on a 3-month T-bill is 5% and the yield on a 10-year T-bond is 7%. The market risk premium is 4.5%, and the return on an average stock in the market last year was 14%. What is the estimated cost of common equity using the CAPM? Round your answer to two decimal places.

________%

Expert Solution

Beta = 0.5

We need to use the 10-year T-bond rate as the risk free rate because the projects are of long term. We should not use the 3-month t bill rate as the risk-free rate

rf = 7%

Market risk premium = 4.5%

rm - rf = 4.5%

CAPM

r_e = r_f + β * (r_m - r_f)

r_e = 0.07 + 0.5 * 0.045

r_e = 0.07 + 0.0225

r_e = 0.0925

r_e = 9.25%

The estimated cost of common equity using the CAPM is 9.25%

jeff jeffy answered 2 years ago

A 5-year Treasury bond has a 3.7% yield. A 10-year Treasury bond yields 7%, and a...

A 5-year Treasury bond has a 3.7% yield. A 10-year Treasury bond yields 7%, and a 10-year corporate bond yields 8.5%. The market expects that inflation will average 3% over the next 10 years (IP10 = 3%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities:...

A 5-year Treasury bond has a 4.8% yield. A 10-year Treasury bond yields 6.95%, and a...

A 5-year Treasury bond has a 4.8% yield. A 10-year Treasury bond yields 6.95%, and a 10-year corporate bond yields 9%. The market expects that inflation will average 2.55% over the next 10 years (IP10 = 2.55%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities:...

A 5-year Treasury bond has a 4.7% yield. A 10-year Treasury bond yields 6.15%, and a...

A 5-year Treasury bond has a 4.7% yield. A 10-year Treasury bond yields 6.15%, and a 10-year corporate bond yields 8.05%. The market expects that inflation will average 2.25% over the next 10 years (IP10 = 2.25%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities:...

a. A 10-year 5% coupon bond has a yield of 8% and a duration of 7.85...

a. A 10-year 5% coupon bond has a yield of 8% and a duration of 7.85 years. If the bond yield increases by 60 basis points, what is the percentage change in the bond price? b. Alpha Insurance Company is obligated to make payments of $2 million, $3 million, and $4 million at the end of the next three years, respectively. The market interest rate is 8% per annum. i. Determine the duration of the company’s payment obligations. ii. Suppose...

1. A. Why is the bond equivalent yield of a T?bill higher than the yield calculated...

1. A. Why is the bond equivalent yield of a T?bill higher than the yield calculated on a discount basis? (Some of the bond equivalent yields are the same as the discount yield in Exhibit 7.4 because the Wall Street Journal rounds the numbers presented and they aren’t really the same.) B. Why do issues of securities by U.S. government agencies tend to have higher interest rates than similar issues of debt by the U.S. Treasury? C.What did the Federal...

You see the current 3-month T-bill quoted on a discount basis at1.9325-1.9250. The T-bill has...

You see the current 3-month T-bill quoted on a discount basis at 1.9325-1.9250. The T-bill has a $10,000 face value. The T-bill has 90 days until maturity. What price would you receive for selling one of these T-bills (disregarding transaction charges)? Enter the price you would receive rounded to the nearest cent.

You see the current 3-month T-bill quoted on a discount basis at 1.9325-1.9250. The T-bill has...

You see the current 3-month T-bill quoted on a discount basis at 1.9325-1.9250. The T-bill has a $10,000 face value. The T-bill has 86 days until maturity. What is the bid-ask spread on this quote on a price basis rounded to the nearest cent?

What is the yield of a 3-year bond with a coupon rate of 7% and face...

What is the yield of a 3-year bond with a coupon rate of 7% and face value of $100? Assume the bond is currently trading at a price of $100, and that coupons are paid semi-annually. Assume semi-annual compounding.

Find the price of 10-year 5% coupon bond if the price of 10-year 7% coupon bond...

Find the price of 10-year 5% coupon bond if the price of 10-year 7% coupon bond is $107 and 10-year interest rate is 6.5%. All bonds have $100 face value and pay semi-annual coupons.

A five-year $1000 face value bond has a 5% coupon rate and a 10% yield to...

A five-year $1000 face value bond has a 5% coupon rate and a 10% yield to maturity. It makes annual coupon payments selling for $810.46. Please calculate this bond’s (20 points) Macaulay duration Modified duration Convexity If the interest rate rises by 100 bps, what would be the dollar amount change in price?

Question