You need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns:

a. What was XYZ€™s average historical return?
b. Compute the market€™s and XYZ€™s excess returns for each year. Estimate XYZ€™s beta.
c. Estimate XYZ€™s historical alpha.
d. Suppose the current risk-free rate is 3%, and you expect the market€™s return to be 8%. Use the CAPM to estimate an expected return for XYZ Corp.€™s stock.
e. Would you base your estimate of XYZ€™s equity cost of capital on your answer in part (a) or in part (d)? How does your answer to part (c) affect your estimate?Explain.

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Risk-free Return 5% 196 Market Return Year 2007 2008 XYZ Return 6% -37% 10% -45%