Company ABX is analyzing a major expansion of its main line of business. Operating

Management has provided cash flow forecasts for the Project Z, but is uncertain of what to use as a

discount rate to determine its net present value. In this regard, the Chief Financial Officer has asked you

to produce an estimate of the cost of equity, and has given you the information in the tables below. The

project will be financed with a capital structure of Debt/Value = 0,20. You are supposed to produce a clear

presentation, showing your rationale for every component of your calculation.

Capital Market Return Data Current Yields on Government Securities Annualized Yield to Maturity 3-Month T-Bills 1,31% 1-Year Bonds 1,40% 5-Year Bonds 2,07% 10-Year Bonds 4,23% 20-Year Bonds 4,46% Historic Average Total Annual Returns on Government Securities and Common Stocks (1980-2015) Average Annual Standard Return Deviation T-Bills 5,2% 3,0% Intermediate Bonds 6,4% 6,6% Long-term Bondst 6,0% 10,8% Large Company Stocks 14,0% 16,8% Small Company Stocks 17,8% 25,6% Historic Average Total Annual Returns on Government Securities and Common Stocks (1929-2015) Average Annual Standard Return Deviation T-Bills 3,8% 3,3% Intermediate Bondsa 5,4% 5,8% Long-term Bondsb 5,5% 9,2% Large Company Stocks 12,7% 20,3% Small Company Stocks 17,7% 34,1% Portfolio of Government bonds with maturity near 5 years. bPortfolio of Government bonds with maturity near 20 years. Standard & Peer's 500 Stock Price Index. dA subset of small cap stocks traded on the NYSE Selected Data for Comparable Firms Debt/Value Market Values Book Values Comparable 1 0,10 0,30 Comparable 2 0,05 0,10 Comparable 3 0,35 0.50 2,5 2,3 3,4 Capital Market Return Data Current Yields on Government Securities Annualized Yield to Maturity 3-Month T-Bills 1,31% 1-Year Bonds 1,40% 5-Year Bonds 2,07% 10-Year Bonds 4,23% 20-Year Bonds 4,46% Historic Average Total Annual Returns on Government Securities and Common Stocks (1980-2015) Average Annual Standard Return Deviation T-Bills 5,2% 3,0% Intermediate Bonds 6,4% 6,6% Long-term Bondst 6,0% 10,8% Large Company Stocks 14,0% 16,8% Small Company Stocks 17,8% 25,6% Historic Average Total Annual Returns on Government Securities and Common Stocks (1929-2015) Average Annual Standard Return Deviation T-Bills 3,8% 3,3% Intermediate Bondsa 5,4% 5,8% Long-term Bondsb 5,5% 9,2% Large Company Stocks 12,7% 20,3% Small Company Stocks 17,7% 34,1% Portfolio of Government bonds with maturity near 5 years. bPortfolio of Government bonds with maturity near 20 years. Standard & Peer's 500 Stock Price Index. dA subset of small cap stocks traded on the NYSE Selected Data for Comparable Firms Debt/Value Market Values Book Values Comparable 1 0,10 0,30 Comparable 2 0,05 0,10 Comparable 3 0,35 0.50 2,5 2,3 3,4