Question

Aluminum maker Alcoa has a beta of about 1.81​, whereas Hormel Foods has a beta of 0.3. If the expected excess return of the market portfolio is 55​%, which of these firms has a higher equity cost of​ capital, and how much higher is​ it?

​Alcoa's equity cost of capital is ​%. ​(Round to two decimal​ places.)

​Hormel's equity cost of capital is %. ​(Round to two decimal​ places.) ​

Therefore, ▼ has the higher equity cost of capital by nothing percentage points.  ​(Select from the​ drop-down menus and round to two decimal​ places.)

Answer 1

​Alcoa's equity cost of capital = Beta * expected excess return of the market portfolio
= 1.81 * 55%
= 99.55%

​Hormel's equity cost of capital = Beta * expected excess return of the market portfolio
= 0.3 * 55%
= 16.5%

Difference = 99.55% - 16.5% = 83.05%

​Alcoa has the higher equity cost of capital by 83.05%

Note : Please check whether the expected excess return of the market portfolio is 55​% or 5% in this question.