Maria Lang, CFO of Spring Textiles, needs to estimate the cost of common equity for the firm. The beta for Spring Textiles is 1.3. The 10-year Treasury bond rate is 3.42%. The debt to equity ratio is .4 and the corporate tax rate is 21%. Maria plans to use a market risk premium of 6.5%.

a. Estimate the cost of equity for Spring Textiles. (2 points)

b. ColorBlast, Inc. is a small privately held textile firm. The CFO of ColorBlast wishes to estimate its cost of equity and plans to use the beta of Spring Textiles, a firm with similar operations. ColorBlast has a debt to equity ratio of 1.0 and a corporate tax rate of 21%. Assume a debt beta of .3. Calculate the cost of equity for ColorBlast based on the above relevant information.