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Valentin [98]
3 years ago
14

Common Stock is 2.5 million shares with a current price of $42 per share; the beta of the stock is 1.34; the standard deviation

of the stock is 10.5%. Market: The US Treasury bill is yielding 2.8% and the expected return on the market is 11.2% and the expected return on the market is 11.2%. The corporate tax rate is 38%. What is the firm's cost of equity
Business
2 answers:
Kamila [148]3 years ago
3 0

Answer:

the firm's cost of equity is 17.808%

Explanation:

A firm's cost of equity is the return expected by holders of Common Stock.

The Data available allows us to use the Capital Asset Pricing Model (CAPM) to determine the cost of Equity.

Cost of Equity = Risk Free Rate + Company`s Beta × Expected Return on Market Portfolio

                       = 2.8%+1.34×11.2%

                       = 17.808%

shutvik [7]3 years ago
3 0

Answer:

Cost of equity = 14.1%

Explanation:

<em>The capital asset pricing model is a risk-based model. Here, the return on equity is dependent on the level of reaction of the the equity to changes in the return on a market portfolio. These changes are captured as systematic risk. The magnitude by which a stock is affected by systematic risk is measured by beta.</em>

Under CAPM, Ke= Rf + β(Rm-Rf)

Rf-risk-free rate (treasury bill rate), β= Beta, Rm= Return on market.

Rf- 2.8% , Rm- 11.2%, β-1.34

Using this model,

Ke= 2.8% + 1.34×(11.2%-2.8%)

= 14.1%

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Machinery purchased for $64,200 by Sheridan Co. in 2016 was originally estimated to have a life of 8 years with a salvage value
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Answer:

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3 years ago
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3 years ago
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