Measuring risk Look again at Table 9.1. This time we will concentrate on Union Pacific.
a. Calculate Union Pacific’s cost of equity from the CAPM using its own beta estimate and the industry beta estimate. How different are your answers? Assume a risk-free rate of 2% and a market risk premium of 7%.
b. Can you be confident that Union Pacific’s true beta is not the industry average?
c. Under what circumstances might you advise Union Pacific to calculate its cost of equity based on its own beta estimate?
d. You now discover that the estimated beta for Union Pacific in the period 2008–2012 was 1.3. Does this influence your answer to part (c)?