Question

A firm has 10,000 shares outstanding, and the price of the stock is $50/share. If the beta is 1.4 and the risk-free rate is 4%, what would be the cost of equity if the expected market return is 10% and tax is 30%?

Answer 1

The cost of equity for the firm is 12.4%.

Step-by-step explanation:

The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM). The formula for the cost of equity is:

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

Given the information provided:

• Risk-Free Rate = 4%
• Beta = 1.4
• Expected Market Return = 10%

Plugging in these values into the formula, we get:

Cost of Equity = 4% + 1.4 * (10% - 4%)

Simplifying the calculation, we have:

Cost of Equity = 4% + 1.4 * 6%

Cost of Equity = 4% + 8.4%

Cost of Equity = 12.4%

Therefore, the cost of equity for the firm is 12.4%.