03-10-2002, 09:35 PM
this question is from spring 2001 number 43. i am ok with the first two parts but the third part is what trips me up. the solution i have uses the beta of assets and return of assets to find the expected risk premium. what i dont understand is why couldnt you use the beta of debt and the return of debt, or for that matter the beta of equity and the return on equity to solve for the expected market risk premium. in the textbook for example on page 233 there is a formula that allows you to solve for the expected market risk premium using the aforementioned. if i try to solve 43 though using this formula and not the return and beta for assets i get the incorrect answer. why cant we do the problem using these numbers? any help would be appreciated. thanks.