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Suppose that you are trying to come up with an estimate of annual equity cost of capital for your firm. You consider using the Carhart
Suppose that you are trying to come up with an estimate of annual equity cost of capital for your firm. You consider using the Carhart model to carry this out. Assume that the market risk premium is 11%, the size premium (E[SMB]) is 3%, the value premium (E[HML]) is 8%, the momentum premium (E[UMD]) is 9%. The riskless rate is 4%. When you regress the excess returns of your firm on the market excess return (MKT), the size factor (SML) and the value factor (HML), you obtain the following betas ( t-statistics are in parentheses): What is your estimate for the firm's cost of capital? A. 7.70% B. 11.70% C. 15.83% D. 11.83%
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