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Assume a risk-free rate of interest of 4%, an expected rate of return on the market...

Assume a risk-free rate of interest of 4%, an expected rate of return on the market portfolio of 9% and a beta of 1.2 then the traditional domestic CAPM
results in a cost of equity of

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Answer #1

Using CAPM,

Cost of equity = Rf + beta x (Rm - Rf)

where, Rf - Risk Free rate = 4%, Rm - Market Returns = 9%

=> Cost of equity = 4% + 1.2 x (9% - 4%) = 10%

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