Estimating cost of equity using CAPM requires estimation of three variables: risk-free rate, Beta, Market risk premium. Answer the following questions, assuming you are valuing the firms stock, say Disney.

a. What does the (nominal) risk-free rate depend on? What maturity of the Treasury instrument measures the true risk-free rate?

b. In practice, a long-term treasury instrument is used to estimate the risk-free rate (10 year or 30 year). Why would you use a 10-year treasury yield as a proxy for the risk-free rate and why would you use a 30-year risk-free rate?

c. What does beta of a company depend on? Explain.

d. Explain how you would estimate beta of a company. Make sure you specify how you would compute the returns of the stock and the market (what would be the length of each period, how many observations, and what would be the proxy for the market you would use) with reasoning. Then specify the methodology you would use. Explain your reasoning.

e. What does the market risk premium depend on? Explain.

f. How would you estimate the market risk premium? Explain both the historical and the forwardlooking approaches outlined in the text and then explain what you would do.