Question

Assume the​ following: The​ risk-free rate is​ 2%, the expected return on the market is​ 7%,...

Assume the​ following: The​ risk-free rate is​ 2%, the expected return on the market is​ 7%, and this​ firm's stock is twice as risky as the market on average. What would be the cost of equity for this​ firm? A. ​12% B. ​20% C. ​14% D. ​8%

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Solution :

The Cost of equity of a firm is calculated using the following formula :

Cost of equity = RF + [ β * ( RM - RF ) ]

Where

RF = Risk free rate of return   ; β = Beta of the stock;   RM = Expected return on the market

As per the information given in the question we have

RF = 2 %   ; RM = 7 %   ;

β = twice as risky as the market on average = 2 * 1 = 2

( Beta is a measure of risk. The market Beta is = 1 )

Applying the above values in the formula we have

= 2 % + [ 2 * ( 7 % - 2 % ) ]

= 2 % + [ 2 * 5 % ]

= 2 % + 10 % = 12 %

= 12 %

Thus the cost of equity for the firm is = 12 %

Thus the solution is Option A. 12 %

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The risk-free rate of return is 2 percent, and the expected return on the market is...
The risk-free rate of return is 2 percent, and the expected return on the market is 7.8 percent. Stock A has a beta coefficient of 1.7, an earnings and dividend growth rate of 7 percent, and a current dividend of $3.00 a share. Do not round intermediate calculations. Round your answers to the nearest cent. If the beta coefficient falls to 1.4 and the other variables remain constant, what will be the value of the stock? $___________ Explain why the...
1. Assume the expected return on the market is 5 percent and the risk-free rate is...
1. Assume the expected return on the market is 5 percent and the risk-free rate is 4 percent. - What is the expected return for a stock with a beta equal to 1.00? (Round answers to 2 decimal places, e.g. 15.25.) Expected return 2. Assume the expected return on the market is 8 percent and the risk-free rate is 4 percent. - What is the expected return for a stock with a beta equal to 1.50? (Round answers to 2...
The risk-free rate of return is 4 percent, and the expected return on the market is...
The risk-free rate of return is 4 percent, and the expected return on the market is 7.1 percent. Stock A has a beta coefficient of 1.4, an earnings and dividend growth rate of 6 percent, and a current dividend of $1.50 a share. Do not round intermediate calculations. Round your answers to the nearest cent. What should be the market price of the stock? $ If the current market price of the stock is $45.00, what should you do? The...
Assume that the risk-free rate rf is equal to 2%, the market expected return is equal...
Assume that the risk-free rate rf is equal to 2%, the market expected return is equal to 10%. Stock RGB has a volatility of 15% and a beta of 1.2. Stock SHC has a volatility of 25% and a beta of 0.7. Please mark the only FALSE statement: a. the expected return of RGB is equal to 11.6% b. the expected return of SHC is equal to 7.6% c. SHC stock has more market risk than RGB d. SHC stock...
2) A stock has an expected return of 10.2 percent, the risk-free rate is 3.9 percent,...
2) A stock has an expected return of 10.2 percent, the risk-free rate is 3.9 percent, and the expected return on the market is 11.10 percent. What must the beta of this stock be? (5 points) Is it more or less risky than average? (5 points) Explain what is that the beta coefficient measures. (5 points) 3) A company currently has a cost of equity of 17.8 percent. The market risk premium is 10.2 percent and the risk-free rate is...
The current risk free rate of return is 3% and the expected return on the market...
The current risk free rate of return is 3% and the expected return on the market is 8%. Calculate the cost of equity (required rate of return) for a stock with a Beta = 0.54. Calculate the cost of equity (required rate of return) for a stock with a Beta = 1.35. Create a one way data table to determine the cost of equity by varying Beta. Use your data table to generate a graph. Include a title and label...
Assume that the current dividend (D0) is $2, risk free rate is 6%, market return is...
Assume that the current dividend (D0) is $2, risk free rate is 6%, market return is 12%, and firm’s beta is 1.333. The firm’s dividends are expected to follow the following growth pattern. Estimate the firms current stock price (P0). You must show your calculations. Year. Dividend growth rate 1-2. 25% 3-4. 20% 5-6. 15% 7 on. 9%
Calculate the following: The cost of equity if the risk-free rate is 2%, the market risk...
Calculate the following: The cost of equity if the risk-free rate is 2%, the market risk premium is 8%, and the beta for the company is 1.3. The cost of equity if the company paid a dividend of $2 last year and is expected to grow at a constant rate of 7%. The stock price is currently $40. The weighted average cost of capital (WACC) if the company has a total value of $1 million with a market value of...
EXPECTED AND REQUIRED RATES OF RETURN Assume that the risk-free rate is 6.5% and the market...
EXPECTED AND REQUIRED RATES OF RETURN Assume that the risk-free rate is 6.5% and the market risk premium is 8%. What is the required return for the overall stock market? Round your answer to two decimal places. % What is the required rate of return on a stock with a beta of 0.6? Round your answer to two decimal places. %
() The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively....
() The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), what is the expected rate of return on a security with a beta of 1.25?     (s) Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? (A coupon bond pays annual interest, has a par value...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT