Question

The expected rate of stock market return is 11.2% and the risk-free rate is 5%. What is the appropriate cost of capital for a project with Beta = 1.3?

Answer 1

The appropriate cost of capital for a project given a Beta of 1.3, an expected stock market return of 11.2%, and a risk-free rate of 5% is calculated using the CAPM formula. The cost of capital in this case works out to be 13.06%.

Step-by-step explanation:

The appropriate cost of capital for a project with a Beta of 1.3, given an expected rate of stock market return of 11.2% and a risk-free rate of 5%, can be calculated using the Capital Asset Pricing Model (CAPM). The formula for CAPM is:

Cost of Equity = Risk-free rate + (Beta * (Market Return - Risk-free rate))

Plugging in the values, we get:

Cost of Equity = 5% + (1.3 * (11.2% - 5%))

Therefore:

Cost of Equity = 5% + (1.3 * 6.2%)

Cost of Equity = 5% + 8.06%

Cost of Equity = 13.06%

Thus, the appropriate cost of capital for this project is 13.06%.