Final answer:
The cost of common stock can be calculated using the CAPM (Capital Asset Pricing Model) formula: Cost of Common Stock = Risk-Free Rate + Beta × (Market Expected Return - Risk-Free Rate). In this case, the cost of common stock is 11.2%.
Step-by-step explanation:
The cost of common stock can be calculated using the CAPM (Capital Asset Pricing Model) formula:
Cost of Common Stock = Risk-Free Rate + Beta × (Market Expected Return - Risk-Free Rate)
In this case, the risk-free rate is 4%, the market expected return is 12%, and the beta is 0.9. Plugging in these values into the formula, we get:
Cost of Common Stock = 4% + 0.9 × (12% - 4%) = 4% + 0.9 × 8% = 4% + 7.2% = 11.2%
Therefore, the cost of common stock with these parameters is 11.2%.