Question

Blossom Industries common stock has a beta of 1.2. If the market risk-free rate is 4.6 percent and the expected return on the market is 9.1 percent, what is Blossom’s cost of common stock? (Round answer to 1 decimal places, e.g. 15.2%.) Cost of common stock %

Answer 1

Information provided:

Beta= 1.2

Risk free rate= 4.6

Expected market return= 9.1%

The question is solved with the help of the capital asset pricing model.

The cost of common stock is calculated using the Capital Asset Pricing Model (CAPM) which is calculated using the formula below:

Ke=Rf+b[E(Rm)-Rf]

Where:

Rf=risk-free rate of return

Rm=expected rate of return on the market.

b= stock’s beta

Ke= 4.6% + 1.2*(9.1 – 4.6)

    = 4.6% + 5.40%

    = 10%

Therefore, the cost of common stock is 10%.

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