Use the following information for the next 5 questions. You are using an index to help you determine the market risk premium. The index is expected to pay dividends of $7 and is currently traded at $210. The current yield on 5-year TIPS is 3.2%, and on 5-year Treasury notes is 6.0%. Labor productivity is expected to grow at 2.0%, and labor supply at 1.5%. Since you believe the index is under- valued, you expect the average PE will increase by 1.5%.

- What is the market risk premium?

- Assuming a firm has a beta of 2.0, what is the risk premium on the firms equity?