If you are given: a current yield to maturity on 30 year treasury bonds (eg 2%), a current yield to maturity on 3 month treasury bills (eg 1%), most recent one year return on the S&P 500 (eg 5%), and an estimate of expected average return on the S&P 500 over the next 30 years (eg 8%), and you are instructed to calculate the cost of equity of a target company with the given formula: Cost of equity = Risk-free rate + Stock Beta * Market risk premium.

My question is: what values do you use as the risk-free rate and the expected return on market portfolio to determine the market risk premium?

Answer rating: 100% (QA)

The market risk premium is the difference between the expected return ... View the full answer