Question

The common stock of Modern Interiors has a beta of 1.61 and a standard deviation of 27.4 percent. The market rate of return is 13.2 percent and the risk-free rate is 4.8 percent. What is the cost of equity for this firm?

Answer 1

18.324%

Step-by-step explanation:

Given:

Beta = 1.61

Standard deviation = 27.4 percent

Market rate of return = 13.2 percent

Risk-free rate = 4.8 percent

Now,

cost of equity for the firm is calculated as:

Cost of equity

= Risk-free rate + Beta × (Market rate of return - Risk-free rate)

on substituting the respective values, we get

Cost of equity = 4.8% + 1.61 × ( 13.2% - 4.8% )

or

The cost of equity of the firm = 18.324%