The common stock of Serenity Homescapes has a beta of 1.21 and a standard deviation of 17.8 percent. The market rate of return i

Question

3 years ago

13

s 13.5 percent and the risk-free rate is 3.2 percent. What is the cost of equity for this firm

1 answer:

3241004551 [841] · Answer 1 · 2023-02-05T04:11:42+03:00

Considering the available information in the question, the cost of equity for this firm is "0.1566."

The cost of equity for the firm is expressed below:

RE = Rf + β × ( E (RM) − Rf );

Here, the RE is the

Rf => risk-free => 3.2 percent;

β => beta => 1.21;

E (RM) => market rate of return => 13.5 percent;

Thus, we have the following formula to compute:

RE = 0.032 + 1.21 × (0.135 − 0.032)

RE = 0.1566

Cost of equity is a term that is used I'm describing the rate of return firms need for business investment.

In another way, the Cost of equity depicts the rate of return that an individual needs for an equity investment.

Hence, in this case, it is concluded that the correct answer is "0.1566."