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 shown here,

, and Table 2 shown here,

,

calculate the cost of capital using the FFC factor specification if the current risk-free rate is 2.7% per year.

b. Microsoft's CAPM beta over the same period was 0.96. What cost of capital would you estimate using CAPM?

QUESTIONS TO BE ANSWERED:

a. Using the data in Table 1 and Table 2, calculate the cost of capital using the FFC factor specification if the current risk-free rate is 2.7% 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 0.96 What cost of capital would you estimate using CAPM?

The cost of capital using the CAPM is _______%. (Round to two decimal places.)

Data Table (Click on the icon located on the top-right comer of the data table below in order to copy its contents into a spreadsheet) Table 1: Estimated Factor Betas, 2005-2015 MSFT 1.05 -0.46 0.09 -0.02 GE Factor MKT SMB HML PR1YR 0.78 -0.62 0.21 0.32 1.29 0.39 0.82 0.22 PrintDone