The Abacus Computer Company has decided to use the Capital Asset Pricing Model to

estimate its cost of equity. The firm's beta was estimated at 1.4. The S&P/TSX Composite-stock

index has returned 12.5% to investors over a fairly long period of time, and Abacus has decided

to use this value as the market return. Treasury bills are currently providing investors with a

6.5% yield.

A) Calculate Abacus's cost of equity using the CAPM.

B) If its beta was incorrectly estimated, and a new revised estimate of 1.8 was used in the

calculations, what would its new estimate of the cost of equity be?