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 5.8% and the expected market return is 15.6%, what is the cost of equity for Stan if the beta of the stock is

A. 0.53

B. 0.89

C. 0.99

D. 1.33

**Round to 2 decimal places**

Answer 1

A)

Cost of equity = Risk free rate + beta(market return - risk free rate)

Cost of equity = 5.8% + 0.53(15.6% - 5.8%)

Cost of equity = 5.8% + 5.194%

Cost of equity = 10.99%

B)

Cost of equity = 5.8 % + 0.89(15.6% - 5.8%)

Cost of equity = 5.8% + 8.722%

Cost of equity = 14.52%

C)

Cost of equity = 5.8% + 0.99(15.6% - 5.8%)

Cost of equity = 5.8% + 9.702%

Cost of equity = 15.50%

D)

Cost of equity = 5.8% + 1.33(15.6% - 5.8%)

Cost of equity = 5.8% + 13.034%

Cost of equity = 18.83%