10. It is 1 January 1997. Normal America, Inc. (NA) has paid a year-end dividend in each of the last 10 years, as shown by the table below: a. Calculate NAs with respect to the S&P 500. b. Suppose that the Treasury bill rate is 5.5% and that the expected return on the market is E(rM) = 13%. If the corporate tax rate TC = 35%, calculate NAs cost of equity using both the classic CAPM and tax-adjusted model. c. Assume that NAs cost of debt is 8%. If the company is financed by 1/3 equity and 2/3

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F 1 Year S&P 500 return 2 3 4 5 B C D E NORMAL AMERICA, INC. Dec. 15 Dec. 31 dividend per stock price share 33.00 30.69 2.50 1987 35.38 2.50 1988 42.25 3.00 1989 34.38 3.00 1990 36.25 1.60 1991 32.25 1.40 1992 43.00 0.80 1993 42.13 0.80 1994 52.88 1.10 1995 55.75 1.60 1996 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 6 7 8 4.7% 16.2% 31.4% -3.3% 30.2% 7.4% 9.9% 1.2% 37.4% 22.9% 9 10 11 12 13