Booher Book Stores has a beta of 0.4. The yield on a 3-month T-bill is 5% and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 14%. What is the estimated cost of common equity using the CAPM?

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A: Debt equity ratio2/3Coupon rate5.30%Beta1.98T-bill returns1.50%Market risk premium8.80%Tax rate40%

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Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.