Question

Assume that Rf = 7 percent and Km = 12 percent. Compute Kj (the cost of equity) if the beta is 0.5.

Answer 1

Solution:
	Cost of equity (Kj) = 9.50%
Working Notes:
	As per CAPM Cost of equity (Kj) = rf + (Km-rf) x B
	Cost of equity (Kj)=??
	B= Beta of the stock = 0.50
	rf= risk free rate = 7%
	Km = expected return for the market = 12%
	Kj= rf + (Km-rf) x B
	Kj = 7% + (12% - 7%) x 0.5
	Kj = 7% + 5% x 0.5
	Kj= 7% + 2.50%
	Kj=9.50%
Hence,	Kj (the cost of equity) = 9.50%
Please feel free to ask if anything about above solution in comment section of the question.