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svetoff [14.1K]
3 years ago
8

The Nixon Corporation’s common stock has a beta of 1.3. If the risk-free rate is 4.4 percent and the expected return on the mark

et is 10 percent, what is the company’s cost of equity capital?
Business
1 answer:
Xelga [282]3 years ago
8 0

Answer:

11.68%

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 4.4% + 1.3 × (10% - 4.4%)

= 4.4% + 1.3 × 5.6%

= 4.4% + 7.28%

= 11.68%

The (Market rate of return - Risk-free rate of return)  is also called market risk premium

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