1. What is the cost of equity capital for PCP based on the CAPM (Capital Asset Pricing Model), and the information given here:

Berkshire Hathaways cost of equity was 9.2%, which reflected a beta of 0.90, an expected market return of 9.90%, and a risk-free rate of 2.89%. The yield on corporate bonds rated AA was 3.95%and after a 39% expected marginal tax rate, the cost of debt would be 2.3%. Weights of capital were 16.9% for debt and 83.1% for equity. In contrast, the beta for PCP was 0.38. Analysts expected that PCPs cash flows would grow indefinitely at about the long-term expected real growth rate of the U.S. economy, 2.5%.

1. 5.55%
2. 6.65%
3. 9.20%
4. 11.80%

*Note: Please read carefully, the question asks for the equity capital of PCP, not Berkshire Hathaway.

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