Question

The cost of equity for a firm is 20%. If the real interest rate is 5%, the inflation premium is 3%, and the market risk premium is 2%, what is the investment risk premium for the Firm

Answer 1

Answer: 10%

Explanation:

Investment risk premium is used to determine the returns an investor makes in excess of real interest rates, inflation and the market return;

= Cost of Equity - Real interest rate - Inflation premium - Market risk premium

= 20% - 5% - 3% - 2%

= 10%