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Looking at Table 9.1 . This time we will concentrate on Union Pacific. a. Calculate Union Pacific's cost of equity from the CAPM using its
Looking at Table 9.1 . This time we will concentrate on Union Pacific.
a. Calculate Union Pacific's cost of equity from the CAPM using its own beta estimate and the industry beta estimate. How different are your answers? Assume a risk-free rate of 2% and a market risk premium of 7%.
b. Can you be confident that Union Pacific's true beta is not the industry average?
c. Under what circumstances might you advise Union Pacific to calculate its cost of equity based on its own beta estimate?
TABLE 9.1 Estimates of betas and standard errors for a sample of railroad companies and for an equally weighted portfolio of these companies, based on monthly returns from March 2015 to February 2020. The portfolio beta may be more reliable than the betas of the individual companies. Note the lower standard error for the portfolioStep by Step Solution
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