Question

What is the cost of equity for the TMB Corporation based on the following information? Risk premium = 5% Risk free rate = 4% TMB beta: 1.50

Answer 1

Information provided:

Risk free rate= 4%

Beta= 1.50

Risk premium= 5%

The cost of equity is calculated using the Capital Asset Pricing Model (CAPM) which is calculated using the formula below:

Ke=Rf+b[E(Rm)-Rf]

Where:

Rf=risk-free rate of return 6.47 is used here.

b= stock’s beta

Ke= 4% + 1.50*5%

     = 4% + 7.50%

     = 11.50%.

Therefore, the cost of equity for TMB Corporation is 11.50%.

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