Question
Standard & Poors current sovereign credit rating for Australia is AAA. Assume that you are an investor thinking of buying shares of ABC Ltd, which
Standard & Poors current sovereign credit rating for Australia is AAA. Assume that you are an investor thinking of buying shares of ABC Ltd, which trades on the Australian Securities Exchange (ASX). ABC Ltd has a mix of equity and debt capital. The average maturity of ABC Ltds debt is 5 years. You want to estimate ABC Ltds cost of capital for valuation and need an estimate of the risk-free rate. You could choose the 5-year Australian Government Bond (3.25%) or the 10-year Australian Government Bond (2.50%). Use your understanding of a risk-free asset to explain which government bond approximates a risk-free asset more closely.
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