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estimate of the market risk premium is 7%. The risk-free rate of return is 4% and...

estimate of the market risk premium is 7%. The risk-free rate of return is 4% and General Motors has a beta of 1.6. What is General Motors' cost of equity capital using the CAPM equation?

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Answer #1

Information provided:

Risk free rate= 4%

Market risk premium= 7%

Beta= 1.6

The cost of equity capital is calculated using the Capital Asset Pricing Model (CAPM)

The formula is given below:

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

Where:

Rf=risk-free rate of return which is the yield on default free debt like treasury notes

Rm=expected rate of return on the market.

Rm-Rf= Market risk premium

= Stock’s beta

Ke= 4% + 1.6*7%

     = 4% + 11.20%

     = 15.20%.

Therefore, General Motors’ cost of equity capital is 15.20%.

In case of any query, kindly comment on the solution.

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