Question

If the IOP Corporation follows CAPM and the market and risk-free rate of return are 12 and 5 percent, respectively. Obtain the firm’s beta, assuming that the cost of equity capital is 13 percent. Round your final answer to two decimal places.

Answer #1

**Solution:**

Cost of equity capital as per Capital Asset Pricing Model is calculated using the following formula :

R_{E} = R_{F} + [ β * ( R_{M} -
R_{F} ) ]

Where

R_{E} = Cost of equity capital ;
R_{F} = Risk free rate of return ; β = Beta of the stock ;
R_{M}
= Market rate of return

As per the information given in the question we have

R_{F} = 5 % ; R_{M} = 12
% ; R_{E} = 13 % ; β =
To find

Applying the above values in the formula we have

13 % = 5 % + [ β * ( 12 % - 5 % ) ]

13 % = 5 % + [ β * ( 7 % ) ]

13 % - 5 % = β * ( 7 % )

8 % = β * ( 7 % )

β = 8 / 7 = 1.1429

β = 1.14 ( when rounded off to two decimal places )

**Thus the beta of IOP Corporation is = 1.14**

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