Question

The Nixon Corporation’s common stock has a beta of 1.7. If the risk-free rate is 4.8 percent and the expected return on the market is 10 percent, what is the company’s cost of equity capital?

Answer 1

13.64%

Step-by-step explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

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

= 4.8% + 1.7 × (10% - 4.8%)

= 4.8% + 1.7 × 5.2%

= 4.8% + 8.84%

= 13.64%

The (Market rate of return - Risk-free rate of return) is also called market risk premium