2 & 3 please

2. The following table summarizes risk premiums for stocks in the United States, relative to treasury bills and bonds, for different time periods: Risk Premium for Equity Stocks - T.Bills Stocks - T.Bonds Arithmetic Geometric Arithmetic Geometric 1926-1990 8.41% 6.41% 7.24% 5.50% 1962-1990 4.10% 2.95% 3.92% 3.25% 1981-1990 6.05% 5.38% 0.13% 0.19% A. What does this premium measure? B. Why Is the geometric mean lower than the arithmetic mean for both bonds and bills? C. If you had to use a risk premium, would you use the most recent data (1981-1990), or would you use the longer periods? Explain your reasoning. 3. The following are the betas of the equity of four forestry/paper product companies, and their debt/equity ratlos. Company Beta Debt/Equity Ratio Weyerhauser 1.15 33.91% Champion International 118 54.14% Intenational Paper 1.OS 45.50% Kimberly-Clark 0.91 11.29% (All the firms face a corporate tax rate of 40%) A Estimate the unlevered beta of each firm. What do the unlevered betas tell you about these firms? B. Assume now that Kimberly Clark is planning to increase its debt/equity ratio to 30%. What will its new beta be? C. If you were valuing an initial public offering in the paper products area, what beta would you use in the valuation? (Assume that the firm going public plans to have a debt/equity ratio of 40%.)