Question

Smathers Corp. stock has a beta of 1.23. The market risk premium is 7.00 percent and the risk-free rate is 2.86 percent annually. What is the company's cost of equity?

Answer 1

Answer:

the company's cost of equity is 11.47 %.

Explanation:

The Company`s cost of equity is the return that is required by holders of Common Stocks.

The Cost can be determined using the Capital Asset Pricing Model (CAPM) as follows :

Cost of Equity = Return on Risk Free Rate + Beta × Return on Market Portfolio

                       = 2.86 % + 1.23 × 7.00 %

                       = 11.47 %.