You work for Microsoft Corporation (ticker: MSFT), and you are considering whether to develop a new software product. The risk of the investment is the same as the risk of the company.

a. Using the data in Table 13.1 and in the table above, calculate the cost of capital using the FFC factor specification if the current risk-free rate is 3% per year.

b. Microsoft’s CAPM beta over the same time period was 0.88. What cost of capital would you estimate using the CAPM?

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