Question

You have risen through the ranks of a coffee comany, from the lowly green-apron barista to the coveted black apron, and all the way to CFO. A quick internet check shows that your company's beta is 0.56. The risk-free rate is 6.43 and you believe the market risk premium to be 5.33. What is your best estimate of investors expected retum on your company's stock (its cost of equity capital? The expected return is Round to two decimal places.)

Answer 1

Question Summary

Beta = 0.56

Risk Free Rate = 6.4%

Market Risk Premium = 5.3%

Calculate Expected Return ?

Solution

As per Capital Asset Pricing Model

Expected Return = RF + Beta (RM - RF)

Where , RF = Risk free rate

RM-RF = Market risk Premium

Therefore,

Expected Return = 6.4% + 0.56*5.3%

= 6.4% + 2.97%

Expected Return = 9.37%