Smaltz Enterprises is currently involved in its annual review of the firm$$s cost of capital. Historically, the firm has relied on the CAPM to estimate its cost of equity capital. The firm estimates that its equity beta is $1\mathrm{.}25,$ and the yield to maturity on long$-$term US Treasury bonds is $4\mathrm{.}28\%.$ The firm$$s CFO is currently in a debate with one of the firm$$s advisers at its investment bank about the level of the market risk premium. Historically, Smaltz has used $7\%$ to approximate the market risk premium. However, the investment banker argues that this premium has shrunk dramatically in recent years and is more likely to be in the $3\%$ to $4\%$ range.

Estimate Smaltz$$s cost of equity capital using a market risk premium of $3\mathrm{.}5\%.$

Smaltz$$s capital structure is comprised of $75\%$ equity $($based on current market prices$)$ and $25\%$ debt on which the firm pays a yield of $5\mathrm{.}125\%$ before taxes at $25\%.$ What is the firm$$s WACC using both a $3\%$ and $4\%$ market risk premium?

Estimate the cost of equity for Caliber$$s using the CAPM and McDonalds Corporation$$s beta.

McDonalds Corporation has an enterprise value of about $$80$ billion and a debt of $$15$ billion. If Caliber$$s has no debt financing, what is your estimate of Caliber$$s beta coefficient? You can assume that McDonalds$$ debt has a beta of $\mathrm{.}20.$