Question: In the problems below, use 5.5% as your market risk premium and 40% as your tax rate where none is specified.
In December 1995, Boise Cascade's stock had a beta of 0.95. The Treasury bill rate at the time was 5.8%, and the Treasury bond rate was 6.4%. The firm had outstanding of $1.7 billion and a market value of equity $1.5 billion; the corporate marginal tax rate was 36%.
a. Estimate the expected return on the stock for a short-term investor in the company. (The arithmetic average risk premium for stocks over T.Bills was 8.76% at the time of this assessments)
b. Estimate the expected return on the stock for a long-term investor in the company.