Question

The common stock of ABC, Inc., has a beta of 1.13 and a standard deviation of 21.4 percent. The market rate of return is 12.7 percent and the risk-free rate is 4.1 percent. What is the cost of equity for this firm

Answer 1

Answer:

The appropriate answer is "13.82%".

Explanation:

Given:

Risk free rate,

$R_f=4.10$

Beta of stock,

$\beta=1.13$

Market rate,

= $12.7$

Now,

The market risk premium will be:

⇒ $R_p$ = $Market \ rate-Risk \ free \ rate$

        = $12.7-4.1$

        = $8.60$ (%)

hence,

The cost of equity will be:

⇒ $r=R_f+\beta\times R_p$

      $=4.10+1.13\times 8.60$

      $=4.10+ 9.718$

      $=13.82$ (%)