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?

Answer 1

Answer:

$CAPM=5.6\%$

Explanation:

as it is said we must apply the CAPM model, so we have:

$CAPM=r_{f}+\beta (E\(r_{m})-r_{f} )$

where $CAPM$ is the capital asset pricing model, $r_{f}$ is the risk free of the market, $\beta$ is the relation between the market benchmark and an asset return, and $E(r_{m})$ is the  expected return of an asset

$CAPM=0.041+1.3(0.0525-0.041)$

$CAPM=5.6\%$