The standard deviation of returns on ABC Corporation is 25% per year. The correlation coefficient between returns on ABC and the returns on the market portfolio is 0.65. The risk free rate is currently equal to 2% and the expected return on the market portfolio is 10%. The standard deviation of the market portfolio is 15%.
a. Calculate ABC’s cost of equity using the capital asset pricing model (CAPM).
b. Assuming a 34% tax rate, calculate ABC’s weighted average cost of capital. The ABC Corporation can borrow at 7%. The debt constitutes 40% of its assets.
Please do not use excel functions
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