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Estimate the cost of equity for the firm

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Reference no: EM133056207

1. The following represents the results of a three-factor regression of a company's stock returns on three factors - market risk premium, small minus big risk premium and high book-to-market minus low book-to-market risk premium, for the last 60 months.

Average Annual Market Risk Premium: 0.078
Average Annual Small Minus Big (SMB) Risk Premium: 0.045
Average Annual High Minus Low (HML) Risk Premium: 0.06
The regression coefficients of the regression are as follows:
Beta for Market Risk Premium: 1.39
Beta for SMB: -0.09
Beta for HML: 0.14

Assume a risk-free rate of 3.9%

a. Estimate the cost of equity for the firm.

b. What do the the 4.5% SMB risk premiums and 6% HML risk premiums mean?

c. How would you interpret the SMB and HML regression coefficients?

Reference no: EM133056207

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