Dr Thompson must estimate a required return on equity (which is also a required return on total capital because Microsoft has no long-term debt). Dr Thompson uses an equally weighted average of the CAPM and FFM estimates. The table below shows the cost of equity information for Microsoft Corporation.

	Model A	Model B
Current risk- free rate	1.41%	1.41%
Market Beta	1.31	1.26
Market (Equity) risk premium	6.2%	6.2%
Size beta		-0.41
Size premium (SMB)		3.1%
Value beta		-0.24
Value premium (HML)		4.8%

Dr Thompson and his colleague Greer are apprised that their firms economic unit expects that the marketplace will favour growth-oriented equities over the coming year. Dr Thompsons and Greers fund holds positions for 4 years on average.

Reviewing all the information, Greer makes the following statements:

Statement 1: Microsofts cost of equity benefits from the companys above average market capitalization.

Statement 2: If our economic units analysis is correct, growth-oriented portfolios are expected to outperform value-oriented portfolios over the next year. As a consequence, we should favour the CAPM required return estimate over the FamaFrench estimate.

Using only the above information, address the following.

I. Estimate Microsofts cost of equity using the:

a. CAPM.

b. FamaFrench model.

II. Judge whether Greers first statement, concerning Microsofts cost of equity, is accurate. Explain your answer.

III. Judge whether Greers second statement, concerning the expected relative performance of growth-oriented portfolios and the use of the CAPM and FFM required return estimates, is correct.