Question
Analysts want to estimate the cost of equity for TAR Corporation to use later in a long-term firm valuation analysis. They believe that a beta
Analysts want to estimate the cost of equity for TAR Corporation to use later in a long-term firm valuation analysis. They believe that a beta based on analyses of recent past returns is appropriate to assess TAR's risk level in the future. They found from recent stock return analyses that the standard deviation of TAR's returns is 0.08, the standard deviation of the market returns is 0.04 and the correlation coefficient between TAR and the market returns is 0.8. The historical market return is 7.50%. Treasury Yield 1-year T-STRIPS Yield 0.15% 2-year T-STRIPS Yield 0.45% 10-year T-STRIPS Yield 2.50% How much is the cost of equity for TAR Corp? O A. 8.5% O B. 9.5% O C. 10.5% OD. 11.5% O E. None of the answers given in A., B., C. and D. are correct.
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