You work for Microsoft Corporation (ticker: MSFT), and you are considering whether to develop a new software product. The risk of the investment is the same as the risk of the company. a. Using the data in Table 1 and Table 2 below, calculate the cost of capital using the FFC factor specification if the current risk-free rate is 3.1% per year. b. Microsoft's CAPM beta over the same period was 0.84. What cost of capital would you estimate using CAPM? Table 1: Estimated Factor Betas Factor MSFT XOM GE Mkt 0.992 0.879 1.183 SMB -0.266 -0.807 -0.475 HML -0.092 0.196 0.965 PR1YR -0.082 0.381 -0.200 Factor Portfolio Mkt - 14 SMB HML PR1YR Table 2: FFC Portfolio Average Monthly Returns, 1927-2012 Average Monthly Return (%) 95% Confidence Band (%) 0.591 +0.34 0.245 +0.20 0.385 +0.22 0.649 +0.29 a. Using the data in Table 1 and Table 2 below, calculate the cost of capital using the FFC factor specification if the current risk-free rate is 3.1% per year. The cost of capital using the FFC factor specification is %. (Round to two decimal places.) b. Microsoft's CAPM beta over the same period was 0.84. What cost of capital would you estimate using CAPM? The annual RP produced by the CAPM beta is ]%. (Round to two decimal places.) You work for Microsoft Corporation (ticker: MSFT), and you are considering whether to develop a new software product. The risk of the investment is the same as the risk of the company. a. Using the data in Table 1 and Table 2 below, calculate the cost of capital using the FFC factor specification if the current risk-free rate is 3.1% per year. b. Microsoft's CAPM beta over the same period was 0.84. What cost of capital would you estimate using CAPM? Table 1: Estimated Factor Betas Factor MSFT XOM GE Mkt 0.992 0.879 1.183 SMB -0.266 -0.807 -0.475 HML -0.092 0.196 0.965 PR1YR -0.082 0.381 -0.200 Factor Portfolio Mkt - 14 SMB HML PR1YR Table 2: FFC Portfolio Average Monthly Returns, 1927-2012 Average Monthly Return (%) 95% Confidence Band (%) 0.591 +0.34 0.245 +0.20 0.385 +0.22 0.649 +0.29 a. Using the data in Table 1 and Table 2 below, calculate the cost of capital using the FFC factor specification if the current risk-free rate is 3.1% per year. The cost of capital using the FFC factor specification is %. (Round to two decimal places.) b. Microsoft's CAPM beta over the same period was 0.84. What cost of capital would you estimate using CAPM? The annual RP produced by the CAPM beta is ]%. (Round to two decimal places.)
