Harrison Solar Inc. (HSI) has an estimated beta of 1.27. Currently, the short-term U.S. treasury...
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Harrison Solar Inc. (HSI) has an estimated beta of 1.27. Currently, the short-term U.S. treasury interest rate is 0.1% per year. Historically in the U.S., returns to the broad stock market have averaged 11.8% per year while short term treasury interest rates have averaged 3.4% per year. Globally, returns to the broad stock market have averaged 9.7% while returns on low risk investments similar to U.S. treasuries have averaged 3.9%. Based on a survey of investment management professionals, the expected return to the broad U.S. market over the next several years is 6.3% per year.
(a) What estimate of the market risk premium is supported by the historical U.S. evidence?
(b) What estimate of the market risk premium is supported by the historical global evidence?
(c) Relying on the CAPM, and the historical global evidence, what is the expected rate of return on HSI common stock?
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