Question

Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of equity from retained earnings?

a. 10.93%
b. 10.60%
c. 9.67%
d. 9.97%
e. 10.28%

Answer 1

Answer:

a. 10.93%

Explanation:

Cost of equity using CAPM formula is as follows;

CAPM ; r = risk free + beta (Market Risk Premium)

risk free (rRF)  = 4.10%

beta ; b = 1.30

Market Risk Premium (MRP) = 5.25%

CAPM r; = 4.10% + 1.30(5.25%)

CAPM r = 4.10% + 6.825%

= 10.925%

Therefore, to 2 decimal places, cost of equity is 10.93% making choice A correct.