Company ABC Corporation is operating on US market. Risk-free rate on US market is equal to 1%. Beta of company ABC is equal to 2.0. The estimate of risk-premium is equal to 6%. Question

3.1: Assuming that CAPM model holds, find return on equity for company ABC? (15 points)

Question 3.2: Assuming that CAPM model holds, find return on debt for company ABC? Company ABC has credit rating equal to BB. Use table below.

15 TABLE 12.3 Average Debt Betas by Rating and Maturity" By Rating A and above BBB BB B CCC Avg. Beta 15 Year Avg. Beta 0.01 0.06 0.07 0.14 Source: S. Schacfer and I. Strebulaev, Risk in Capital Structure Arbitrage," Stanford GSB working paper, 2009