[CAPM Estimate of Cost of Equity Capital] 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.