1.Helen is working in CopCo's finance department and she is trying to determine the company's cost of capital. Copco is financed entirely with equity (ie. 100% equity, no debt). Helen wants to use the average of industry peers' asset betas as the proxy for CopCo's asset beta. She has identified three industry peers and calculated their equity betas and leverage as shown below. The risk-free rate is 3% and the market risk premium is 5%. Assume debt beta is zero. Equity beta DDE) 1.60 1.80 2.00 1.80 20% 30% 40% 30% -Mean (0) What are CopCo's (a) equity beta (b) cost of equity (c) cost of capital? (ii) If Copco decides to change to a new capital structure with 20% debt and 80% equity, what would be CopCo's equity beta under the new capital structure? 2.In practice, we often regress a stock's returns against those of a broad market index, such as the S&P 500 Index, to find the stock's equity beta. Monthly returns from the previous 5 years are commonly used in the regressions. However, this methodology is not always appropriate. For each of the three scenarios below, comment whether this methodology is appropriate or not, and briefly state your reasoning. Hint: Finance is forward looking. What is the inherent assumption we make when we use historical data to come up with an estimate for the future? See whether this assumption holds in each of the following three cases. istress 2 years ago, but is now financially healthy. (i) Company B is doing well. Its financial leverage and business operations haven't changed much over the past 5 years (i) Company C just entered a new business that is a lot more risky than the companys current businesses. The new business is expected to generate the majority of the firm's cash flows after 2 years