Firm A has common stock with a market value of $9 million and debt with a market value of $1 million. Firm A has an equity beta of 1.5. The debt is risk-free, and the company does not pay tax. The 3-year T-bill rate is 4.1% and the 10-year bond is 5.2%. The market premium above the appropriate riskless rate of return is 7.6%. a. What is the required return on Firm A's common stock? b. What is the company's cost of capital? c. What discount rate should be used to discount incremental cash flows if the company is considering expanding its current business?

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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.