Question

Heino Inc., hired you as a consultant to help them estimate their cost of capital.  You have been provided with the following data:  risk-free rate = 5%; market risk premium = 6.0%, and beta = 1.05.  Based on the CAPM approach, what is the cost of equity from retained earnings given a flotation cost of 10%?

10.50% / 10.71% / 10.88% / 11.30% / 11.60%

Answer 1

According to CAPM:

$\small k_e = R_f +( \ss \times R_p)$

Where,
k_e = Cost of equity
R_f = risk-free rate
$\small \ss$ = Beta
R_p = market risk premium

Therefore,

$\small k_e = 5\%+( 1.05 \times 6.0\%)$

$\small = 5\%+6.30\%$

$\small = 11.30\%$

Therefore, the cost of equity is 11.30%