Nero Violins has the following capital structure:
Security Beta Total Market Value ($ millions)
Debt 0 $100
Pref Stock .20 40
Common Stock 1.20 299
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.)
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 5% and a market risk premium of 6%. (Do not round intermediate calculations. Round your answer to 3 decimal places.) Discount rate %