Question: Nero Violins has the following capital structure: Security Debt Preferred stock Common stock Beta 0 0.27 1.27 Total Market Value ($ millions) $ 107 47

Nero Violins has the following capital structure: Security Debt Preferred stock Common stock Beta 0 0.27 1.27 Total Market Value ($ millions) $ 107 47 306 a. What is the firm's asset beta? (Hint: What is the beta of a portfolio of all the firm's securities?) (Do not round intermediate calculations. Round your answer to 3 decimal places.) Asset beta b. Assume that the CAPM is correct. What discount rate should Nero set for investments that expand the scale of its operations without changing its asset beta? Assume a risk- free interest rate of 4% and a market risk premium of 5%. Ignore taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Discount rate %

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