Question: Please write out a step by step explanation. Thanks! A firm's stock has a market capitalization of 120 million and an equity beta of 0.75.

Please write out a step by step explanation. Thanks! A firm's

Please write out a step by step explanation. Thanks!

A firm's stock has a market capitalization of 120 million and an equity beta of 0.75. Bonds issued by the firm have a yield rate of 7.7%. Bonds with a similar debt rating has a default rate of 2.7% and a loss rate of 45%. The total market value of the firm's bonds is 80 million. The risk free rate is 1.5% and the market risk premium is 7.8%. The volatility of the market portfolio is 22%. Suppose that the CAPM assumptions hold. Calculate the covariance between the return of the firm's assets and the return of the market portfolio. 0 0.0260 0.0287 D 0.0342 @ 0.0314 @ 0.0232

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