Look again at Table This time we will concentrate on Burlington Northern a Calculate Burlingtons 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 5 and a market risk premium of 7 b Can you be confident that Burlingtons true beta is not the industry average c Under what circumstances might you advise Burlington to calculate its cost of equity based on its own betaestimate Standard Error 19 23 Burlington Northern Santa Fe Canadian Pacific CSX Kansas City Southern Norfolk Southern Union Pacific Industry portfolio Beta 1 01 1 34 1 14 1 75 1 05 1 16 1 24 24 21 18

Question: Look again at Table. This time we will concentrate on Burlington Northern. a. Calculate Burlingtons cost of equity from the CAPM using its own beta

Look again at Table. This time we will concentrate on Burlington Northern.

a. Calculate Burlingtonâ€™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 5% and a market risk premium of 7%.
b. Can you be confident that Burlingtonâ€™s true beta is not the industry average?
c. Under what circumstances might you advise Burlington to calculate its cost of equity based on its own betaestimate?

Standard Error 19 .23 Burlington Northern Santa Fe Canadian Pacific CSX Kansas City Southern Norfolk Southern Union Pacific Industry portfolio Beta 1.01 1.34 1.14 1.75 1.05 1.16 1.24 24 21 .18

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