Discount Retailers has an overall beta of .96 and a cost of equity of 10.4% for...
Discount Retailers has an overall beta of .96 and a cost of equity of 10.4% for the firm overall. The firm is financed soley by common stock. Division A within the firm has an estimated beta of 1.13 and is the riskiest of all of th firms divisions. What is an appropriate cost of capital for division A if the market risk premium is 5%?
Homework Answers
From CAPM,
Cost of equity = Risk free rate + Beta*(Market risk premium)
0.104 = Risk free rate+ 0.96*0.05
Risk free rate= 5.6%
division A:
Now again From CAPM,
Cost of equity = Risk free rate + Beta*(Market risk premium)
=5.6%+ 1.13*5%
COST OF EQUITY or CAPITAL= 11.25%
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