Final answer:
The cost of equity for Smathers Corporation is calculated using the CAPM formula and it amounts to 12.072% annually. This incorporates the given risk-free rate, the stock's beta, and the market risk premium.
Step-by-step explanation:
The cost of equity for Smathers Corporation can be calculated using the Capital Asset Pricing Model (CAPM), which takes into account the risk-free rate, the stock's beta, and the market risk premium.
To calculate the cost of equity for Smathers Corporation, which has a beta of 1.16, we use the following CAPM formula:
Cost of Equity = Risk-Free Rate + (Beta × Market Risk Premium)
Hence, for Smathers Corporation:
Cost of Equity = 3.14% + (1.16 × 7.70%)
The calculation yields:
Cost of Equity = 3.14% + (1.16 × 7.70%) = 3.14% + 8.932% = 12.072%
Therefore, the company's cost of equity is 12.072% annually.