Question

P11-9 (similar to) EQuestion Help Cost of equiry: SML. Stan is expanding his business and wil sel common stock for the needed trds. If the current risk-free rate is 6.3% and to epected market return t, 14 5, wh is the cost of equity for Stan ithe beta of the stock is a. 0.57 b. 0 93 C. 0.95 d. 1.292 a. What is the cost of equity for Stan if the beta of the stock is 0.57 ?% Round to two decmal places.)

Answer 1

Under the Capital Asset pricing model
Rs = Rf + Beta*(Rm-Rf)
where Rs is the cost of equity, Rf is the risk free rate that is .063, Rm - Rf = difference between the expected return on the market
portfolio and the riskless rate (.145 - .063), Beta = .57
Rs = .063 + .57*(.082)
Rs = .1097
a) The cost of equity for Stan is 10.97%