(CAPM) A firm has a beta of 1.5. If expected market return is 5.5% and risk-free...

Question

Question

(CAPM) A firm has a beta of 1.5. If expected market return is 5.5% and risk-free rate is 2%, what is the cost of equity?

Show formula and work by hand-only. Do not use excel.

Answer 1

Answer #1

Using CAPM Model,

Cost of Equity = R_f + Beta(R_m - R_f)

Here,

R_f = 2%

Beta = 1.5

R_m = 5.5%

Cost of Equity = 2 + 1.5(5.5 - 2)

Cost of Equity = 7.25%

Answer 2

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