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Nat2105 [25]
3 years ago
14

Hampton Corporation has a beta of 1.3 and a marginal tax rate of 34%. The expected return on the market is 11% and the risk-free

interest rate is 6%. Estimate the firm’s cost of internal equity.
Business
1 answer:
Maurinko [17]3 years ago
6 0

Answer: 12.5%

Explanation:

Given the following :

Beta (B) = 1.3

Marginal tax rate = 34%

Risk free interest rate = 6%

Market rate of return = 11%

The cost of equity is calculated using the relation:

Risk free rate of return + Beta(market rate of return - risk free rate of return)

Cost of equity = 6% + 1.3(11% - 6%)

Cost of equity = 6% + 1.3(5%)

Cost of equity = 6% + 6.5%

Cost of equity = 12.5%

Therefore, the firm's cost of internal equity is 12.5%

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