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ivanzaharov [21]
3 years ago
12

g which is debt-free and finances only with equity from retained earnings. You were given the following information: rRF = 3.50%

; RPM = 4.50%; and b = 0.88. What is the firm's cost of equity from retained earnings based on the CAPM?
Business
1 answer:
Pachacha [2.7K]3 years ago
3 0

Answer: 7.46%

Explanation:

The CAPITAL ASSET PRICING MODEL is a very useful tool for calculating a firm's Cost of Equity.

The Formula is,

Rc = Rrf + b(Rpm)

Where,

Rc is the Cost of Equity

Rpf is the Risk risk free rate

b is beta

Rpm is the risk premium

Plugging in the digits we have,

Rc = 0.0350 + 0.88(0.045)

= 0.0746

The firm's cost of equity from retained earnings based on the CAPM is therefore 7.46%

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