In the melded country risk premium approach, you estimate the country risk premium by multiplying the country default spread by the volatility of equity markets, relative to the volatility in government bonds in that market. Assume that your estimate for a mature market equity risk premium is 6%, that the default spread for Indonesia is 2%, and that the standard deviation of Indonesian equities is 24% while the standard deviation of the Indonesian government bond is 12%. Estimate the total equity risk premium for Indonesia. 12%10%6%4% QUESTION 5 Increasing the proportion of debt in a company's capital structure increases shareholder value because the cost of debt is generally lower than the cost of (levered) equity. True False QUESTION 6 One concern with using sector-average betas, even if you adjust for financial leverage, is that you are assuming that the operating leverage for your is similar to that of the other firms. Assume that 70% of the costs in your company are fixed costs, whereas only 50% of the costs in the average company in the sector are fixed costs. If the unlevered beta for the sector is 0.80, what would you expect the unlevered beta for your company to be? Higher than 0.80 Lower than 0.80 About 0.80