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-Dominant- [34]
3 years ago
5

Eaton Electronic Company’s treasurer uses both the capital asset pricing model and the dividend valuation model to compute the c

ost of common equity (also referred to as the required rate of return for common equity). Assume: Rf = 3 % Km = 6 % β = 1.1 D1 = $ 0.50 P0 = $ 15 g = 5 % a. Compute Ki (required rate of return on common equity based on the capital asset pricing model). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Business
1 answer:
Montano1993 [528]3 years ago
4 0

Answer:

Ki = 0.063 or 6.30%

Explanation:

The CAPM or Capital asset pricing model is an approach to calculate the required rate of return of a stock. The required rate of return or cost of equity is the minimum return required by the investors o invest in a stock based on the systematic risk of the stock. The formula to calculate the required rate of return of a stock using the CAPM is,

Ki = Rf + β * (Km - Rf)

Where,

  • Rf is the risk free rate
  • β is the beta of the stock
  • Km is the expected return on the market

Ki = 0.03 + 1.1 * (0.06 - 0.03)

Ki = 0.063 or 6.3%

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