Assume markets are perfect and in equilibrium as described in Chapter 17. Using the following values and the CAPM equation, what is E(rA ), i.e., the expected return for the following firms assets?

Notes & perfect market equations:

In equilibrium, required returns (based on risk) = expected returns

CAPM equation: E(rA) = rf + A (E(rM) rf)

WACC = D/V E(rD) + E/V E(rE)

E(rE) = E(rA) + (E(rA) - E(rD))

D/E (MM Proposition 2 equation)

A = D/V D + E/V E

E = A + (A - D) D/E

rE = E(rE) =

E = 1.5

rf = 2%

rD = E(rD) = 7%

D =

rM = E(rM) = 15%

rA = E(rA ) = Solve for this

A = D/V = 0.6