Question

An analyst wants to estimate the cost of equity capital for Panther Electronics. She has collected the following data: 2018 Data: $1,500,000.00 Net Income Shareholder equity $6,000,000.00 Risk free rate in economy 2.67% 10.00% Expected Return on S&P 500 Index Beta for Panther Electronics 1.19 What is the cost of equity for Panther Electronics? Submit Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

Answer 1

Cost of equity according to Captial Asset Pricing Method (CAPM):

$\small k_e = R_f + \ss(R_m - R_f)$

Where,
k_e = Cost of equity
R_f = Risk-free rate
R_m = Market risk rate or expected return on S&P 500 index
$\small \ss$ = Beta of the stock

Therefore,

$\small k_e = 2.67\%+ 1.19(10\% - 2.67\%)$

$\small = 2.67\%+ 1.19(7.33\%)$

$\small = 2.67\%+ 8.72\%$

$\small = 11.39\%$

Therefore, the cost of equity for Panther Electronics is 11.39%.