Question

Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 0.70. Based on the CAPM approach, what is the cost of equity from retained earnings? a. 9.25%
b. 7.78%
c. 7.08%
d. 7.00%
e. 8.47%

Answer 1

The cost of equity from retained earnings when using the CAPM approach for Scanlon Inc., would be 7 . 80%

How to find the cost of equity ?

The CAPM method stands for the Capital Asset Pricing Method and it allows for the cost of equity to be calculated by using the beta, the real risk free rate, and the market risk premum.

The cost of equity when using the CAPM method can be found by the formula:
Cost of equity = Real risk free rate + Beta x Market premium

The real risk free rate = 4 . 10 %

Beta = 0 . 70

Market risk premium = 5 . 25 %

The cost of equity is therefore:

Cost of equity = 4 . 10 % +  0 . 70 x 5 . 25 %

Cost of equity = 4 . 10 % + 3.675 %

Cost of equity = 7. 775 %

Cost of equity = 7 . 80%

Find out more on the CAPM method at brainly.com/question/24158909

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