1. In December 1995, Boise Cascade's stock had a beta of 0.95. The treasury bill rate at the time was 5.8%, and the treasury bond rate was 6.4%. The historical risk premium of the Standard&Poor index is 5.5%. The firm had debt outstanding of $ 1.7 billion and a market value of equity of $ 1.5 billion; the corporate marginal tax rate was 36%.

a. Estimate the expected return on the stock for a short term investor in the company.

b. Estimate the expected return on the stock for a long term investor in the company.

c. Estimate the cost of equity for the company.

2. Boise Cascade also had debt outstanding of $ 1.7 billion and a market value of equity of $ 1.5 billion; the corporate marginal tax rate was 36%. The historical risk premium of the Standard&Poor index is 5.5%.

a.Assuming that the current beta of 0.95 for the stock is a reasonable one, estimate the unlevered beta for the company.

3. Biogen Inc., as biotechnology firm, had a beta of 1.70 in 1995. It had no debt outstanding at the end of that year.

a. Estimate the cost of equity for Biogen, if the treasury bond rate is 6.4% and the

expected yield of S&P index is 12%.

b. What effect will an increase in long term bond rates to 7.5% have on Biogen's cost

of equity?