Assume that you want to estimate the cost of equity for a firm that has a beta of 1.2. The 10-year Treasury is trading at 3.1%, and the expected return on the market in the coming year is 8.5%.

a. Using the CAPM equation, what is your estimate for the firms cost of equity?

b. If this is the same firm as in #1, what is your estimated cost of equity using the bond yield plus risk premium method?

c. Give one reason to prefer the CAPM cost of equity and one reason to prefer the bond yield plus risk premium estimate.