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Each year Briggs & Stratton (producer of gasoline engines) estimates its own companywide cost of capital. For the most recent year, it based its calculation
Each year Briggs \& Stratton (producer of gasoline engines) estimates its own companywide cost of capital. For the most recent year, it based its calculation on the following data (info taken from Keown, et al, Financial Management, p. 394): Risk-free rate comes from the current 30 -year government bond yield =6.1% Market Risk Premium comes from the historical average difference between equity returns and long-term bonds returns =6% Equity Beta is estimated by a regression of B\&S stock returns on S\&P 500 returns =0.83 Cost of debt comes from the yield to maturity on the company's bonds =7.5% Capital structure is based on target debt to total market value ratio (D/V) =23% Based on Briggs \& Stratton's assumptions, what is their required return on assets? Solve for Ra using both the asset beta approach and by averaging the cost of debt and cost of equity
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