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Nero Violins has the following capital structure:
Security Beta Total Market Value
($ millions)
Debt 0 $ 119
Preferred stock 0.39 59
Common stock 1.39 318
a. What is the firm's asset beta? (Hint: What is the beta of a portfolio of all the firm's securities?) (Do not round intermediate calculations. Round your answer to 3 decimal places.)
Asset beta
b. 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 4% and a market risk premium of 5%. (Do not round intermediate calculations. Round your answer to 3 decimal places.)
Discount rate %
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