You are using the benchmark method to compute the cost of capital for a project. The project will be 40% debt and 60% equity financed. It has an estimated life of 20 years. The historical return on equity and t-bond yields are shown below. Compute the expected return on your project. Discuss how you arrived at the appropriate time and risk premiums.

1970-2012 Arith Geo

Value-Weighted Stock Market

Net of 1-Year Treasuries 5.8% 4.4%

Net of 30-Year Treasuries 1.7% 0.8%

Net of LT Corporates 1.7% 0.7%

Treasuries Yield

6M 0.67

1Y 1.03

3Y 1.70

5Y 1.77

7Y 1.86

10Y 1.89

20Y 2.34

30Y 2.27