Question

Using the CAPM model estimate the cost of equity if the risk free rate is 2.4%, the market is currently returning 9.90% and the stock's riskiness has been estimated at 2.10. [Round your final answer to two decimal places, i.e. if your answer is 0.12345, input 12.35 (without the percent sign)] Answer: 23.19 X (18.15)

Answer 1

CAPM: Capital Asset Pricing Method.

The capital asset pricing model describes the relationship between the required rate of return, or the cost of equity capital and the non-diversifiable or relevant risk of the firm as reflected in its index of non-diversifiable risk.

Rf= Expected risk- free rate of return. Ie. 2.4

Beta= Beta of Security/Beta coefficient. Ie.2.10

Rm = Market rate of return. Ie. 9.90

Cost of equity/Expect Rate of return = R​​​​​​f + Beta(R​​​​​​m​​​​​ - R​​​​​​f)

Therefore, Cost of equity= 2.4 + 2.10(9.90 - 2.4)

=〉 2.4 + 2.10(7.5)

=〉 2.4 + 15.75

=〉 18.15%

Hence, As per CAPM model cost of equity (ke)= 18.15%