Question

1. The Roland Corporation’s common stock has a beta of 1.45. If the risk-free rate is 2.25 percent and the market risk premium is 7.75 percent, what is the company’s cost of equity capital?

Answer 1

Answer:

10.22%

Explanation:

Data provided

Beta = 1.45

Risk-free rate = 2.25

market risk premium = 7.75%

The computation of company’s cost of equity capital is shown below:-

Risk free rate + Beta × (Expected return on market - Risk free rate)

= 0.0225 + 1.45 × (0.0775 - 0.0225)

= 0.0225 + 1.45 × 0.055

= 0.0225 + 0.07975

= 0.10225

or 10.22%