What is the appropriate cost of common equity

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1. An analyst has collected data about Devers Co. and a world market index. The index implies an equity risk premium of 5 percent, and Devers has a beta of 1.2 with respect to the index. When the residuals from the beta regression are collected and included in the regression model as an additional factor, a segmented market risk premium of 13 percent is calculated and the segmented beta with respect to this factor is 0.8. The appropriate risk-free return is 4 percent. If Devers is estimating the cost of common equity for subsidiaries in developed, integrated foreign markets, what is the appropriate cost of common equity?

a. 10.0%

b. 12.1%

c. 16.8%

d. 18.3%

e. 20.4%

2. You calculate that the duration of your assets of your bank is 6.5 years and the duration of your liabilities is 4.5 years. You currently have $80 million in liabilities and $5 million in equity. What must you do to be immunized against interest rate risk?

Reduce the duration of assets to 4.5 years.

Hold DL the same and reduce DA to 4.3 years.

Increase the duration of liabilities to 6.5 years.

Reduce DA to 5 years and DL to 5.3125 years.

None of the above

Reference no: EM131907362

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