Question

Cost of​ equity: SML. Stan is expanding his business and will sell common stock for the needed funds. If the current​ risk-free rate is 4.2​% and the expected market return is 12.1​%, what is the cost of equity for Stan if the beta of the stock is a. 0.73​? b.  0.92​? c.  0.99​? d.  1.35​?

Answer 1

a.cost of equity=risk-free rate +Beta*(market rate- risk-free rate )

=4.2+0.73*(12.1-4.2)

which is equal to

=9.967%

b.cost of equity=risk-free rate +Beta*(market rate- risk-free rate )

=4.2+0.92*(12.1-4.2)

which is equal to

=11.468%

c.cost of equity=risk-free rate +Beta*(market rate- risk-free rate )

=4.2+0.99*(12.1-4.2)

which is equal to

=12.021%

d.cost of equity=risk-free rate +Beta*(market rate- risk-free rate )

=4.2+1.35*(12.1-4.2)

which is equal to

=14.865%