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CAPM Implications with MRP Negative - WACC Upper/Lower Bounds

nicholasjalonso

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Theoretically, is it possible to have a negative MRP where the Risk free rate is greater than the Market return? I'm thinking of finding the upper and lower bounds for the WACC and the market return is unknown. Would the lower bound be where Expected Market Return equal to Risk Free Rate (giving you a value of zero and negating the MRP)? Therefore the lower bound would have to simply be the risk free rate? What is the CAPM theory behind this type of application?

The problem I am working out was given as:

The firm is financed by 30% of debt and 70% of equity. The corporate tax rate is 21%. The firm pays 2% interest rate on its debt to investors. The risk-free rate in the economy is also 2% and the firm equity has beta of 2.5.
a) What is the lower bound for the firm’s weighted average cost of capital?
b) What is the upper bound for the firm’s weighted average cost of capital?


This applies FRM concepts of CAPM Theory I'm working on during my studies and this question has me stumped.
 
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