Caliber's Burgers and Fries is a rapidly expanding chain of fast-food restaurants, and the firm's management wants to estimate the cost of equity for the firm. As a first approximation, the firm plans to use the beta coefficient for McDonald's Corp. (MCD), which equals .56 as a proxy for its beta. In addition, Caliber's financial analyst looked up the current yield on 10-year U.S. Treasury bonds and found that it was 4.2%. The final piece of information needed to estimate the cost of equity using the capital asset pricing model is the market risk premium, which is estimated to be 5%.

a. Using this information, estimate the cost of equity for McDonald's.

b. McDonald's Corp. has an enterprise value of about $80 billion and a debt of $15billion. If Caliber's has no debt financing, what is your estimate of the firm's beta coefficient? You can assume that McDonald's debt has a beta of .20.