Q. Calculate the Equity Risk Premium

PSUWC currently has 1178000 shares of stock outstanding at a current price of $ 76.00. Even though the company has outstanding stock, it is not publicly traded and therefore there is no publicly available financial information. However, after analysis management believes that its equity beta is 1.04. The company also has 125000 bonds outstanding, with a current price of $ 1,032.00. The bonds pay interest semi-annually at a coupon rate of 5.10 %. The bonds have a par value of $1,000 and will mature in 14 years. The average corporate tax rate was 39 %.

Management believes the S&P 500 is a reasonable proxy for the market portfolio. Therefore, the cost of equity is calculated using the company's equity beta and the market risk premium based on the S&P 500 annual expected rate of return - Balky would calculate the monthly expected market return using 5 years of past monthly price data available in the worksheet Marketdata. This would then be multiplied by 12 to estimate the annual expected rate. Balky remembered that if the expected rate of return for the market was too low, too high, or negative, a forward looking rate of an historical average of about 9.5% would have to be used, as the calculated value for the current 5-year period may not be representative of the future. Balky would consider a E(Rm) between 8-12% acceptable. Balky would calculate the market risk premium: E(Rm) - Rf from the previous calculations using the risk-free rate data available in the worksheet Marketdata. Balky noted that the risk-free rate was on an annual basis.

Marketdata

S&P 500 Closing Data
Date	Adjusted Close
12/1/2021	5579.17
11/1/2021	5499.74
10/1/2021	5446.14
9/1/2021	5468.05
8/1/2021	5512.62
7/1/2021	5523.01
6/1/2021	5506.37
5/1/2021	5591.67
4/1/2021	5553.66
3/1/2021	5505.94
2/1/2021	5456.71
1/1/2021	5352.50
12/1/2020	5308.39
11/1/2020	5205.87
10/1/2020	5234.72
9/1/2020	5116.48
8/1/2020	4980.93
7/1/2020	4868.03
6/1/2020	4753.49
5/1/2020	4765.17
4/1/2020	4741.41
3/1/2020	4487.09
2/1/2020	4558.93
1/1/2020	4432.05
12/1/2019	4366.69
11/1/2019	4396.70
10/1/2019	4318.38
9/1/2019	4364.92
8/1/2019	4390.30
7/1/2019	4263.71
6/1/2019	4259.57
5/1/2019	4272.53
4/1/2019	4200.17
3/1/2019	4155.09
2/1/2019	4063.07
1/1/2019	4118.57
12/1/2018	4136.95
11/1/2018	4092.12
10/1/2018	3973.75
9/1/2018	3957.08
8/1/2018	3864.84
7/1/2018	3922.14
6/1/2018	3849.51
5/1/2018	3863.11
4/1/2018	3837.32
3/1/2018	3795.49
2/1/2018	3794.01
1/1/2018	3727.46
12/1/2017	3667.89
11/1/2017	3558.62
10/1/2017	3555.23
9/1/2017	3480.74
8/1/2017	3398.68
7/1/2017	3406.39
6/1/2017	3437.38
5/1/2017	3424.94
4/1/2017	3379.40
3/1/2017	3327.73
2/1/2017	3300.41
1/1/2017	3305.72
12/1/2016	3232.00