1.A well-known piano manufacturer wishes to expand in China. It decides that 80% of the $32 million it needs will come from debt, and the remaining 20% from selling equity. The cost of debt is 7% and the corporate tax is 35%. To estimate the cost of equity, the firm uses the CAPM with these parameters:

Tequity is the expected return on equity The is the yield on a 3 month Treasury bill Tequity = free + B* ("market - [ free), where B is a coefficient of volatility of the company's returns relative to the market; a value of 1 is average (see week 3) "marker is the average market return in the sector the company operates and (market - I' free) is the risk premium of that sector where . =0.02, B=1.20, and 7.= 0.12