Question

The Rhaegel Corporation's common stock has a beta of 1.3. If the risk-free rate is 5.3 percent and the expected return on the market is 11 percent, what is the company's cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity capital

Answer 1

Cost of Equity Capital = 12.71%

Explanation;

Follwing is the formula of calculating Cost of equity capital;

Cost of equity capital =

Risk free rate + (Market risk premium – Risk free rate) * Beta

As per information of the question, followings information are given;

Risk free rate is given = 5.3%

Beta = 1.3

Expected return on market = 11%

Now let’s put these values in above given formula;

Cost of equity capital = 5.3% + (11% - 5.3%) * 1.3

Cost of equity capital = 5.3% + (5.7%) * 1.3

Cost of equity capital = 5.3% + 7.41%

Cost of equity capital = 12.71%