Question

Cost of common stock equity-CAPM Netflix common stock has a beta, b, of 0.8. The risk-free rate is 6%, and the market return is 14%.

 a. Determine the risk premium on Netflix common stock

 b. Determine the required return that Netflix common stock should provide

 c. Determine Netflix's cost of common stock equity using the CAPM.

 a. The risk premium on Netflix common stock is %. (Round to one decimal place)

 b. The required return that Netflix common stock should provide is % (Round to one decimal place)

 c. Netflix's cost of common stock equity using the CAPM is %. (Round to one decimal place)

Answer 1

SOLUTION :

a. 

Market risk premium, rP 

= rM - rF 

= 14 - 6 

= 8% (ANSWER)

b.

Required rate of return, r ,  as per CAPM model :

= rF + b * rP 

= 6 + 0.8 * 8 

= 12.4 % 

 

Required rate of return = 12.4% (ANSWER)

c.

Cost of equity, r ,  as per CAPM model :

= rF + b * rP 

= 6 + 0.8 * 8 

= 12.4 % 

Cost of equity is = 12.4% (ANSWER)

Answer 2

Solution: a) market risk premium=market return-risk free rate 0.14-0.06 8.0% b) 12.4% required rate of return =risk free rate+beta*(market return-risk free rate) 0.06+0.8*(0.14-0.06) 12.4% cost of common equity using the CAPM 0.06+0.8*(0.14-0.06)