Question

1. Spartan Inc. has the following data: risk-free rate = 4.00%, market risk premium = 6%, and beta = 1.25. What is the firm's cost of equity from retained earnings based on the CAPM?

10.25%

11.50%

11.78%

12.21%

12.40%

Answer 1

Firm's cost of equity from retained earnings based on the Capital Asset Pricing Model (CAPM)

As per Capital Asset Pricing Model [CAPM], The cost of equity from retained earnings is computed by using the following equation

The Cost of Equity = Risk-free Rate + [Beta x Market Risk Premium]

= 4.00% + [1.25 x 6.00%]

= 4.00% + 7.50%

= 11.50%

“Hence, the firm's cost of equity from retained earnings based on the Capital Asset Pricing Model (CAPM) = 11.50%”

Answer 2

To calculate the firm's cost of equity from retained earnings using the Capital Asset Pricing Model (CAPM), we can use the formula:

$\text{Cost of Equity}=\text{Risk-Free Rate}+(\text{Beta}\times \text{Market Risk Premium})$

Given that the risk-free rate is 4.00%, the market risk premium is 6%, and the beta is 1.25, we can plug these values into the formula:

$\text{Cost of Equity}=4.00\mathrm{\%}+(1.25\times 6\mathrm{\%})$

$\text{Cost of Equity}=4.00\mathrm{\%}+7.50\mathrm{\%}$

$\text{Cost of Equity}=11.50\mathrm{\%}$

So, the firm's cost of equity from retained earnings based on the CAPM is 11.50%.