Question

3 P9-9 (similar to) Cost of common stock equity-CAPM Netflix common stock has a beta, b, of 1.4. The risk-free rate is 5%, and the market return is 12%. 1. Determine the risk premium on Netflix common stock . Determine the required return that Netflix common stock should provide -. Determine Netflix's cost of common stock equity using the CAPM. 1. The risk premium on Netflix common stock is %. (Round to one decimal place)

Answer 1

Hello Sir/ Mam

(a)

Risk Premium = Expected Return of Market - Risk free rate = 1.4*(12% - 5%) = 9.8%

(b)

Rate of Return = 5% + 1.4*7% = 14.8%

(c)

Using CAPM, cost of common stock equity = 14.8%

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