Question

You have been hired as a consultant by Feludi Inc.'s CFO, who wants you to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from reinvested earnings?
a. 9.67%
b. 9.97%
c. 10.28%
d. 10.60%
e. 10.93%

Answer 1

Answer:

Cost of equity will be 10.93 %

So option (E) will be the correct answer

Explanation:

We have given risk free return $r_{rf}=4.10%=0.0410$

Market risk premium RPM = 5.25 % = 0.0525

And $\beta =1.30$

We have to find the cost of common from reinvested earnings , that cost of equity

Cost of equity is given by

Cost of equity = risk free rate + $\beta \times market\ risk\ premium$

= 0.0410+1.30×0.0525 = 0.10925 = 10.93 %

So option (E) will be the correct option