Question

Cost of common stock equity—CAPM J&M Corporation common stock has a? beta, b?, of 1.7. The? risk-free rate is 3 %, and the market return is 6?%.

a.??Determine the risk premium on? J&M common stock.

b.??Determine the required return that? J&M common stock should provide.

c.??Determine? J&M's cost of common stock equity using the CAPM.

a.??The risk premium on? J&M common stock is ?%? ?(Round to one decimal? place)

b.??The required return that? J&M common stock should provide is %? ?(Round to one decimal? place)

c. ? J&M's cost of common stock equity using the CAPM is %? (Round to one decimal? place)

Answer 1

Market Return=6%

Risk free Rate=3%

Beta=1.7

A)Risk Premium=Market Return-Risk free Rate =6-3 =3%

B)Required return(Re)=Risk free rate +(beta*Risk Premium)=3+(3*1.7)=8.1%

c)Cost of equity(Ke)=Risk free rate +(beta*Risk Premium)=3+(3*1.7)=8.1%

Note: Required rate of return(Re) may be calculated with dividend discount model but details of dividend and growth rate is not given in the question.and the CAPM model can also be used for the calculation of requird rate (Re).