1. You are analyzing a firm's equity with a correlation of 0.822 with the industry, and a correlation of 0.731 with the overall market. The firm's equity has a historical standard deviation of returns = 24.12%, while the industry's standard deviation = 17.20%, and the market's standard deviation = 14.80%. The firm's current debt-to-equity ratio = 10%, but you expect it to be 30% in the future.Further, the firm's historical tax rate (during the estimation period of past returns) was 35%, but after recent tax law changes, you expect the tax rate to decrease to 26%. The risk free rate is currently 2.85%, and the expected return on the market is 8.30%.

a. What is the forward-looking beta?

i) 1.19 ii) 1.37 iii) 0.85 iv) 1.03

b. What is the cost of equity capital?

i) 10.30% ii) 14.20% iii) 8.44% iv) 8.16%

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