1.) Required returns and discount rates

Firm A has common stock with a market value of $9 million and debt with a market value of $1

million. Firm A has an equity beta of 1.5. The debt is risk-free, and the company does not pay

tax. The 3-year T-bill rate is 4.1%. The expected risk premium is 6%.

a. What is the required return on Firm As common stock?

b. What is the companys cost of capital?

c. What discount rate should be used to discount incremental cash flows if the company is

considering expanding its current business?