Look again at Table 9.1. This time we will concentrate on Norfolk Southern. TABLE 9.1 a. Calculate

Question:

Look again at Table 9.1. This time we will concentrate on Norfolk Southern.

TABLE 9.1

a. Calculate Norfolk Southern's cost of equity from the CAPM using its own beta estimate and the industry beta estimate. How different are your answers? Assume a risk-free rate of 2% and a market risk premium of 7%.
b. Can you be confident that Norfolk Southern's true beta is not the industry average?
c. Under what circumstances might you advise Norfolk Southern to calculate its cost of equity based on its own beta estimate?

Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...