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The following are two questions on the Cost of Capital for a public corporation. Use complete sentences in your discussion of each question. The cost of capital measure represents a weighted average of what all investors (i.e., banks, bondholders, preferred stockholders, and common stockholders) are requiring on the company’s investments (i.e., loans, bonds, preferred stock, and common stock). So the cost of capital is comprised of the cost of debt and the cost of equity. 1. One method uses the CAPM (Capital Asset Pricing Model) to estimate the cost of equity, one of the components of the cost of capital measure. Part of the CAPM equation uses a risk-free rate at the current time. Some companies use the current Treasury bond rate, while others use the Treasury note rate. Discuss which rate you believe is better to use and include why you are picking one over the other. (Keep in mind that the cost of capital is used as a hurdle rate). 2. When a company is trying to decide on what to pay for another company in a takeover or acquisition, we have to decide what the appropriate “hurdle rate” is for that specific acquisition. In other words, we have to determine the minimum return we should accept on this investment; the investment being the whole target company. We can view the cost of capital measure as an indicator of the riskiness of the company’s cash flows. Since we assume investors are risk averse, the more risky the cash flows of a company, the higher the cost of capital. Investors want to be compensated for taking risk. Should the cost of capital measure of the acquiring company OR the cost of capital measure of the target company (i.e., company to be acquired) be used as the hurdle rate in the evaluation on whether or not to purchase the company? Discuss.