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Voice River, Inc., has successfully moved through its early life cycle stages and now is well into its rapid-growth stage. However, by traditional standards this provider of media-on-demand services is still considered to be a relatively small venture. The interest rate on long-term U.S. government securities is currently 7 percent. Voice River’s management has observed that, over the long run, the average annual rate of return on small-firm stocks has been 17.3 percent, while the annual returns on long-term U.S. government securities has averaged 5.7 percent. Management views Voice River as being an average small company venture at its current life cycle stage.
A. Determine the historical average annual market risk premium for small-firm common stocks.
B. Use the CAPM to estimate the cost of common equity capital for Voice River.
Rework Problem 2 under the assumption that, in addition to your venture’s taxable income of $50,000, you expect to personally earn another $10,000 from a second job.
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