Question

When the risk-free return is 3.8%, what is the cost of equity capital for a company whose stock has a historical beta factor of 0.95 and the security market indicates that the premium above the risk-free rate is 4.5%

Answer 1

Answer:

The answer is 8.08%

Explanation:

Ke = Risk free return + Beta * Market premium

Ke= 3.8% + 0.95 * 4.5% = 8.075 % = 8.08%

Answer 2

Answer:

4.43%

Explanation:

Below is the formula of Cost of Equity using Capital Asset Pricing Model.

cost of equity

Where,

E(Ri) = R(f) + β(E(m) - R(f))

E(Ri) = cost of equity

R(f) = Risk-Free Rate of Return

β = Beta of the stock

E(m) = Market Rate of Return

R(f) = 3.8

β = 0.95

E(m) = 4.5

cost of equity = 3.8 + 0.95 (4.5 - 3.8)

                      = 4.43%