Problem: Nero Violins has the following capital structure:
Security Beta Total Market Value ($millions)
Debt 0 $100
Preferred stock .20 40
Common Stock 1.20 299
Q1. What is the firm's asset beta?
Q2. Assume that the CAPM is correct. What discount rate should Nero set for investments that expand the scale of its operations without changing its asset beta? Assume a risk-free interest rate of 5% and a market risk premium of 6%.