Question

11.4

Cost of​ equity: SML. Stan is expanding his business and will sell common stock for the needed funds. If the current​ risk-free rate is 5.5​% and the expected market return is 11.8​%, what is the cost of equity for Stan if the beta of the stock is:

a. 0.61​?

b.  0.93​?

c.  0.98​?

d.  1.23​?

Answer 1

Cost of Equity = Rf + beta * (Rm - Rf)

Answer a)

Cost of Equity = 5.5% + 0.61 (11.8% - 5.5%)

= 9.34%

Answer b)

Cost of Equity = 5.5% + 0.93 (11.8% - 5.5%)

= 11.36%

Answer c)

Cost of Equity = 5.5% + 0.98 (11.8% - 5.5%)

= 11.67%

Answer d)

Cost of Equity = 5.5% + 1.23 (11.8% - 5.5%)

= 13.25%