Q - 2

Q An analyst has assembled the following information regarding Net-Zone Incorporated and the market in general: Net-Zone expected ROE - 16.2% Net-Zone beta - 1.8 Expected return on S&P Index - 10.7% 30-day Treasury bill yield = 3.5% 10-year Treasury bond yield = 4.8% The analyst wants to determine the cost of common equity for Net-Zone’s planned upgrade to its manufacturing facilities, which should affect the firm’s cash flows for the next twelve years. The appropriate cost of equity using the CAPM approach is closet to: A) 14.2% B) 15.4% C) 16.5%

B RFR= 4.8% Kc = 4.8 + 1.8(10.7-4.8)

^^ agreed…BUT Question talks about cash flows for 12 years. Is it ok to use a RFR for only 10 years?

Seems a little strange that they would add that little 12 year tidbit.

I dont think they would want us to extrapolate or interpolate in 2 mins time, so just use the best available, its better then using the 30 day T-Bill yeild … and move on to the next question.

That question comes out of q-bank and usually I read about 1/2 of the question when I see it is a CAPM question and just work the problem. I got it wrong 2 or 3 times and now finally see the twelve years written very nice instead of using MLA correct ‘12.’ I finally see why I got that one wrong all those times.