The return provided by Treasury bonds is considered as risk-free return and provides a basis to compare the return offered by corporate bonds. Refer to Figure 14.3, which shows yields to maturity for corporate bonds for different maturities and default ratings. Calculate the spread to Treasury for a BBB-rated bond for two years and for seven years. Why do the bonds with same credit rating offer different spread to Treasury for different periods? Estimating the Cost of Common Equity for Pearson A review of current market concitions on December 31, 2015, reveals that the 30-yeer U.8. Trasury bond yield that we will use to measure the risk-free rate was 2.27 percent, the estimated marhet risk premium was 5 percent, and the beta STEP 1t Pioture the problem The CAPM describes the relationship between the expected rale of retum on nisky assats and their systematio risk. That is, The risk premium for a common stock issue is estirnated as the risky common stocks beta, cos multiplied by the market risk premium for the portiollo of all risky assels (m)nn. We can visualize the computation of the risk premiurn in the figure below, The 4.95 percent risk premium for Pearson is the prodict of the market risk premium for all risky assets, which we estimated to be 5 percent at the time of the aralysis, multiplied by Pearson's beta coefficient, which is 99 (1.e., 995%=4.95% ) STEP 2: Decicle on a solution strategy Estimating the cost of common equity for Poarson requires that we amive at estmates of two market factors and one firm-specific factor. The market factors in Equation (144) consist of the risk-free rate of interest (which we observed to be 2.27 percent at the time of the analysis) and the market risk premium (estimated to be 4.95 percent), and the firm-specific factor is Pearson's beta coetficient (estimated to be.99). (14.3 CONTMUED ON NEXT PAOE)