Question 4: (from chapter 7) AlphaBeta, Inc., has successfully moved through its early life cycle stages and now is well into its rapid-growth stage. However, by traditional standards this provider of media-on-demand services is still considered to be a relatively small venture. The interest rate on long-term U.S. government securities at the moment is mentioned below. AlphaBeta's management has observed that, over the long run, the average annual rate of return on small-firm stocks, and also the annual returns on long-term U.S. government securities has averaged as the numbers presented below. Management views AlphaBeta as being an average small-company venture at its current life cycle stage. Current U.S. Gov. Long-term Securities Interest Average Small-Firm Annual Rate of Return Average U.S. Gov. Securities Annual Rate of 7,40% 17,30% 5,70% a. Determine the historical average annual market risk premium for small-firm common stocks. b. Use the CAPM to estimate the cost of common equity capital for AlphaBeta. AlphaBeta, Inc., is interested in estimating its WACC now that it is in its rapid-growth stage. The company has the following debt and equity in place, and is in the 30 percent income tax bracket. Short-term bank loan at 9% interest per annum Long-term debt issue at 11% interest per annum Common Equity $570.000 $1.650.000 $42.000.000 c. Determine the after-tax costs of the bank loan and the long-term debt issue. d. Calculate the WACC for AlphaBeta, Inc., using the cost of common equity capital estimated in part b above