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Cost of common stock equity--CAPM Netflix common stock has a​ beta, b​, of 0.6. The​ risk-free...

Cost of common stock equity--CAPM

Netflix common stock has a​ beta, b​, of 0.6. The​ risk-free rate is 6 %​, and the market return is 12​%.

a. Determine the risk premium on Netflix common stock.

b. Determine the required return that Netflix common stock should provide.

c. Determine​ Netflix's cost of common stock equity using the CAPM.

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Answer #1

(a)-Risk premium on Netflix common stock.

Market Risk premium = Market Rate of Return – Risk-free Rate

= 12.00% - 6.00%

= 6.00%

Therefore, the Risk premium on Netflix common stock = Beta of the Stock x Market Risk Premium

= 0.60 x 6%

= 3.60%

(b)-Required return that Netflix common stock

Required return that Netflix common stock = Risk-free Rate + Risk premium on Netflix common stock

= 6.00% + 3.60%

= 9.60%

(c)-Netflix's cost of common stock equity using the CAPM.

As per Capital Asset Pricing Model [CAPM], The cost of common stock equity is calculated by using the following equation

The cost of common stock equity = Rf + B[Rm-Rf]

Where; Risk free rate (Rf) = 6.00%

Beta of the Stock = 0.60

Market Rate of Return (Rm) = 12.00%

Therefore, the cost of common stock equity = Rf + B[Rm-Rf]

= 6.00% + 0.60(12.00% - 6.00%)

= 6.00% + (0.60 x 6.00%)

= 6.00% + 3.60%

= 9.60%

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