As a finance intern at Bacontastic (a manufacturer of bacon and bacon-related novelties), Peter Porkers assignment is to come up with some sizzling insights concerning the firms weighted average cost of capital (WACC). He knows that you can use the CAPM to estimate the cost of equity capital, but he has learned that the CAPM beta does not seem to do a very good job of measuring systematic risk (Note: Assume this is true). Therefore, he decides to estimate a different model for the firms equity cost of capital. Specifically, he runs the following regression:

rt=B+B1CAPM*(rm,t-rf,t)+B2PorkDemandt

PNG where rt is the firms stock returns, (rm,t rf,t) is the market risk premium, and PorkDemandt is a measure of consumers demand for pork products. Peter suggests his model is better than the CAPM since it more accurately measures the risk that Bacontastic faces. Thus, using his model will give Bacontastics finance team a better measure of the firms true WACC.