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 4.0​% and the expected market return is 12.0​%, what is the cost of equity for Stan if the beta of the stock is

a. 0.75​?

b.  0.90​?

c.  1.05​?

d.  1.20​?

Answer 1

(a)	cost of equity =	Risk free Return + (Market Return - Risk free return)* Beta
	cost of equity =	4% + (12% - 4%) * 0.75
	cost of equity =	10.00%
(b)	cost of equity =	Risk free Return + (Market Return - Risk free return)* Beta
	cost of equity =	4% + (12% - 4%) * 0.90
	cost of equity =	11.20%
c)	cost of equity =	Risk free Return + (Market Return - Risk free return)* Beta
	cost of equity =	4% + (12% - 4%) * 1.05
	cost of equity =	12.40%
d)	cost of equity =	Risk free Return + (Market Return - Risk free return)* Beta
	cost of equity =	4% + (12% - 4%) * 1.20
	cost of equity =	13.60%