NewBusiness Inc has a equity beta of $1\mathrm{.}25,$ and a tax rate

of $25\%$ and has $25\%$ debt in its capital structure $($while the

rest is equity$).$ The going interest rate on US Treasury

bond is $4\mathrm{.}25\%$ and NewBusiness has traditionally used a

market risk premium of $3\mathrm{.}5\%.$ Recent survey of market

participants concludes that the market risk premium is

Solution

a$.$

Low ERP High ERP

Cost of equity

b$.$

WACC with Low ERP

WACC with High MRP