Question

The market capitalization of this company is $140 million, it's beta is 0.75, the risk free rate is 2% and the market risk premium is 6%. Use this (and the information from the previous questions to answer the following four questions). What is the cost of equity capital (in percentage so if the answer is 3.4%, enter 3.4)?

Answer 1

Answer:

Ans. The cost of equity capital is 6.5 (6.5%)

Explanation:

Hi, all we need to do is fill the following equation with the data from the problem.

$r(e)=rf+beta*(MRP)$

Where:

rf = Risk free rate (in our case, 2%)

MRP = market risk premium (in our case, 6%)

r(e) = Cost of equity capital

Therefore, this is what we get.

$r(e)=0.02+0.75*0.06=0.065$

So the cost of equity capital is 6.5% or 6.5 as the problem suggests to answer.

Best of luck.