Question: Look again at Table 9.1. This time we will concentrate on Norfolk Southern. TABLE 9.1 a. Calculate Norfolk Southern's cost of equity from the CAPM

Look again at Table 9.1. This time we will concentrate on Norfolk Southern.

TABLE 9.1

a. Calculate Norfolk Southern's cost of equity from the CAPM using its own beta estimate and the industry beta estimate. How different are your answers? Assume a risk-free rate of 2% and a market risk premium of 7%.
b. Can you be confident that Norfolk Southern's true beta is not the industry average?
c. Under what circumstances might you advise Norfolk Southern to calculate its cost of equity based on its own beta estimate?

Canadian Pacific CSX Kansas City Southern Genesee &Wyoming Norfolk Southern Union Pacific Industry portfolio Beta 1.34 1.34 1.27 1.34 1.16 0.98 1.24 Standard Error 0.19 0.14 0.20 0.19 0.16 0.12 0.12

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