1.Question 7 is based on current data and is not part of the case. Data outside the case should only be used for question 7. [15 Points]

An alternative to the CAPM is the Fama-French three-factor model. This model uses the market factor and two additional factors SMB (Size Factor) and HML (Book-to-Market Factor). The risk premiums for these three factors and betas for these factors can be estimated using historical data. Based on this, the expected return [E(R)] or the cost of equity is given by the following model.

Assume the following risk-free rate and premiums in calculating the E( R ).

The three returns for the three factors and the risk-free rate every month can be obtained from French's websitehttp://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.(See the appendix for more details.) Use the past five years (starting from December 2011 to December 2016 of monthly prices (there should be 61 observations and 60 monthly returns) to estimate the factor loadings (or betas) for Boeing. The data for Boeing can be obtained from the yahoo finance websitehttp://finance.yahoo.com.Note that historical information can be downloaded to an excel spreadsheet.Use the adjusted closing prices (last column), which adjust the prices for stock splits and dividends.Finally, the data that is given shows the first trading day of the month. However, theprices are for the last trading day of the month.

I.Use the market model (CAPM) to estimate the cost of equity for Boeing on January 1, 2017.

II.Use the three-factor model to estimate the cost of equity for Boeing on January 1, 2017.