Question

The common stock of Pittsburgh Steel Products has a beta of 1.42 and a standard deviation of 12.55 percent. The market rate of return is 10.6 percent and the risk-free rate is 3.5 percent. What is the cost of equity for Pittsburgh Steel Products?

Answer 1

Calculation of Cost of Equity for Pittsburgh Steel Products

As per Capital Asset Pricing Model (CAPM)

Cost of Equity = Rf + (Rm - Rf) Beta

Where Rf = Risk free rate

Rm = Market Rate of Return

Rf = 3.50

Rm = 10.60

Beta = 1.42

Therefore

Cost of Equity = Rf + (Rm - Rf) Beta

Cost of Equity = 3.50 + (10.60 - 3.50) 1.42

Cost of Equity = 3.50 + 10.082

Cost of Equity = 13.582%

Cost of Equity for Pittsburgh Steel Products is 13.582%

Note : Standard Deviation will not be used while calculating Cost of Equity.