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

Notes & perfect market equations:

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

CAPM equation: E(r_A) = r_f + _A (E(r_M) rf)

WACC = D/V E(r_D) + E/V E(r_E)

E(r_E) = E(r_A) + (E(r_A) - E(r_D)) D/E (MM Proposition 2 equation)

_A = D/V _D + E/V _E

_E = _A + (_A - _D) D/E

r_E = E(r_E) =

_E = 1.5

r_f = 2%

r_D = E(r_D) = 8%

_D =

r_M = E(r_M) = 12%

r_A = E(r_A ) =

_A = Solve for this

D/V = 0.2

Enter your answer to two decimal places (e.g., 12.50). If the answer is negative, enter with the minus sign (e.g., enter as -12.50). Full credit: within 0.01 of the correct answer (e.g, 12.49 - 12.51). Partial credit: within 0.05 of the correct answer (e.g, 12.45 - 12.55).

Note - there are two versions of this question. This question asks for the beta of the assets, _A. The other version asks for the expected return of the assets, E(r_A ). Repeat the quiz until you get to see both versions.