=+Problem 7.1

a. ABC plc has a beta of 1.2. If the risk-free rate of return is 2.5 per cent and the market risk premium is 6.0 per cent, what is ABC’s cost of equity capital?

b. DEF Inc has a beta of 0.75. If the market risk premium is 6.0 per cent and DEF’s cost of equity capital is 8.0 per cent, what is the risk-free rate of return?