Manuel is somewhat confused about his cost of capital. He knows that he

should not rely on the bookstore's historic cost of debt. He therefore phoned

up his bank manager who quoted him an interest rate of $7\%$ if he were to take

out a loan today. Following some extensive research on the internet, he is

pretty sure that the equity beta of his bookstore is roughly $1\mathrm{.}3.$ He asked one

of his regular customers, a finance professor at IE$,$ what risk premium he

should use for the market premium. The professor suggested using a market

risk premium of $5\mathrm{.}8\%$ p$.$a$.$

However, Manuel does not know what rate to use for the risk$-$free rate. He

looked up the yields on various debt securities issued by the Spanish

government and he found the following:

Debt security Current yield

$3-$month bills $,1\mathrm{.}820\%$

$1-$year bills $,2\mathrm{.}655\%$

$3-$year bonos $,2\mathrm{.}746\%$

$5-$year bonos $,2\mathrm{.}952\%$

$10-$year bonos $,3\mathrm{.}384\%$