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 2.5​% and the expected market return is 10.4​%, what is the cost of equity for Stan if the beta of the stock is a. 0.74​? b.  0.92​? c.  1.05​? d.  1.27​?

Answer 1

Case-a
Cost of equity = Risk free rate + Beta * (market rate-Risk free rate)
		2.50% + 0.74 (10.40-2.50)% = 8.35%
Case-b
Cost of equity = Risk free rate + Beta * (market rate-Risk free rate)
		2.50% +0.92 (10.4-2.50) = 9.77%
Case-c
Cost of equity = Risk free rate + Beta * (market rate-Risk free rate)
		2.50% + 1.05 (10.40-2.50) = 10.80%
Case-d
Cost of equity = Risk free rate + Beta * (market rate-Risk free rate)
		2.50% + 1.27 (10.40-2.50)% = 12.53%