Cost of Equity Capital Calculation
What is the cost of equity capital?
Select one: a. 11.1%. b. 10.4%. c. 12.0%. d. 11.9% e. 14.7%.
The correct answer is: 11.1%. How to get this answer?
Answer:
The cost of equity capital can be calculated using the Capital Asset Pricing Model (CAPM). In this case, with a stock beta of 0.58, a risk-free rate of 6.1%, and an expected market return of 14.7%, the cost of equity capital is 11.1%.
The CAPM formula is:
Cost of Equity = Risk-Free Rate + Beta * (Expected Market Return - Risk-Free Rate)
Given:
- Risk-Free Rate = 6.1%
- Beta = 0.58
- Expected Market Return = 14.7%
Plugging these values into the CAPM formula:
Cost of Equity = 6.1% + 0.58 * (14.7% - 6.1%)
= 6.1% + 0.58 * 8.6%
= 6.1% + 4.988%
= 11.088%
Rounding to one decimal place, the cost of equity capital is approximately 11.1%.