1.

Should a negative-beta asset offer a higher or a

lower expected rate of return than the risk-free asset? Does
this make sense?

2. A junk bond with a beta of 0.4 will default with

20% probability. If it does, investors receive only 60% of
what is due to them. The risk-free rate is 3% per annum
and the risk premium is 5% per annum. If the promised rate of return of this bond
is 6%, what is its expected
rate of return?

3. Describe in at most 200 words, the steps, inputs, and techniques required to
estimate
an equity beta for a publicly traded company.

4. Describe in at most 200 words, the steps, inputs, and techniques required to
estimate
the WACC for a private company in the U.S. (e.g., not pblicly traded).

5. Describe in at most 200 words, the steps, inputs, and techniques required to
estimate
the WACC for a specific project within a company in the U.S. (e.g., not pblicly
traded).

6. Describe in at most 200 words, the steps, inputs, and techniques required to
estimate
the WACC for a public company in Colombia (e.g., not publicly traded).

7. Describe in at most 200 words, the steps, inputs, and techniques required to
estimate
the WACC for a private project or a private company in Colombia (e.g., not publicly
traded).

8.Discuss the following in line with the underlying intuition of the CAPM.
Think of projects as part risk-free, part risk. Estimating the appropriate
compensation for a risk-free
investment over a given time frame is the easy part. This is the cost of risk-free
capital.
Now comes the hard part: appropriate compensation for taking risk.
This is the cost of risky capital. Although most corporate projects are not risk
free,
you can think of them as some combination of a safe part (a debt-financed claim)
and a risky
part (an equity-finance claim).

9. Do you agree or desagree with the following? Why: The equity premium is a number
of first-order importance for everybody. It is not just
the corporations want to know it for their cost-of-capital estimation. You also
want to know it as
an investor when you decide how much of your money you should invest in stocks
rather than
bonds. Unfortunately, in real life, the equity premium is not posted anywhereand
no one really
knows the correct number. Worse: Not only is it difficult to estimate, but the
estimate often has a
large influence over all financial decision-making. Cest la vie!

10. There are a number of methods to guestimate the equity premium. Unfortunately,
Should I just give it to you? for many decades now, these methods have disagreed
with one another. It should thus come
as no surprise to you that practitioners, instructors, finance textbook authors,
and everyone
else have been confused and confusing. Finance professors and text-book authors
have two choices:

a) We can throw you one estimate (say 5%), pretend it is the correct one, and hope
that you wont ask
questions. It would be a happy fairy tale ending. Unfortunately, it would also be a
lie.
b) We can confess to the truth. We can tell you how different methods can lead to
different
estimatesand how we are really all in the same boat. Worse, we are not sure where
the
boat has holes.

In this course I take the second route. I explain to you what each method suggests
and actually means. You can then make up your own mind as to what you deem to be
best. (I
will tell you my own personal estimate at the end.) This also has an important
advantage: you
wont be surprised if your boss uses some other equity premium to come to different
conclusions.
At least you will understand why.

the three most prominent methods that form the bases of common equity-premium
estimates:

i) Historical averages of Rm-rf. Sensible to the sample period, rf choice (long-

term vs short-term), geometric or arithmetic mean. Also, uncertainty About
Historical estimates.
ii) Surveys, ask the experts: What to choose? Welcome to the club! No one knows
the true equity premium. Ask the expertsor anyone else who may or may not know.
Its the blind leading
the blind.See https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2816603.
iii) Implied equity risk premium using the Gordon model. E[Rm]=Dt/Po+g.

Discuss the advantages and disadvantages of each method. And tell yourself which
one do you prefer.