Question

The Rhaegel Corporation’s common stock has a beta of 1.6. If the risk-free rate is 6.1 percent and the expected return on the market is 11 percent, what is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

The cost of equity is 13.94%

Explanation:

The cost of equity of the required rate of return (r) is the the minimum level of return that the investor will require to invest in a stock of equity based on its risk. The required rate of return of a stock can be calculated using the CAPM approach. The formula for required rate of return is:

r = rRF + Beta * (rM - rRF)

Where,

• rRF is the risk free rate
• Beta is the stock's beta or measure of risk/volatility
• rM is the expected return on the market

r = 6.1% + 1.6 * (11% - 6.1%)  =  13.94%

Answer 2

Answer:

The cost of equity capital is 13.94 %

Explanation:

According to Miller and Modgiliani in the Capital Asset Pricing Model,the cost of equity is the risk free rate plus the premium rate multiplied by beta factor,which is the risk factor of the market where the investment is taking place.

Ke=Rf+beta*(Market return-Rf)

where Rf is the risk free return of 6.1%

beta is 1.6

market return is 11%

Ke=6.1%+1.6*(11%-6.1%)

Ke=6.1%+1.6*4.9%

Ke=6.1%+7.84 %

Ke=13.94 %

The cost of equity capital expected by stockholders is 13.94 %