Determine the expected return of a company's stock given a risk free rate of 7%, an...

Question

Question

Answer 1

Answer #1

A. Correct Answer 0.145

As per CAPM model

Expected retun = Rf + Beta(Rm-Rf)

where Rf is return from risk free security

Rm is retun from market

Expected return = 0.07 + 1.5 ( 0.12 - 0.7 ) = 0.145

B. Correct Answer The cost of common equity will decrease.

Answer 2

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