Question

Andrade, Inc. (AND) stock has a beta of 1.9, the current risk-free rate is 1.3, and the expected return on the market is 8.8 percent. What is Andrade, Inc.’s cost of equity?

Answer 1

Using the Capital Asset Pricing Model (CAPM), Andrade, Inc.’s cost of equity is calculated to be 15.55%, based on a beta of 1.9, a risk-free rate of 1.3%, and an expected market return of 8.8%.

Step-by-step explanation:

To calculate Andrade, Inc.’s cost of equity, we can use the Capital Asset Pricing Model (CAPM), which expresses the relationship between risk and expected return. The formula for CAPM is:

Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)

Given that Andrade, Inc. has a beta of 1.9, the current risk-free rate is 1.3%, and the expected return on the market is 8.8%, we can plug these values into the formula:

Cost of Equity = 1.3% + 1.9 * (8.8% - 1.3%)
Cost of Equity = 1.3% + 1.9 * 7.5%
Cost of Equity = 1.3% + 14.25%
Cost of Equity = 15.55%

Therefore, the cost of equity for Andrade, Inc. is 15.55%.