Question

Estimate the cost of capital for AT\&T common stock using the Capital Asset Pricing Model. Assume that the risk free rate is 4.96%, the market risk premium is 7.52% and an the stock's equity beta is 1.18. Enter your answer as a percent without the "\%". Round your final answer to two decimals.

Answer 1

The cost of capital for AT&T common stock can be estimated using the Capital Asset Pricing Model (CAPM), taking into account the risk-free rate, market risk premium, and stock's equity beta.

Step-by-step explanation:

The cost of capital for AT&T common stock can be estimated using the Capital Asset Pricing Model (CAPM). CAPM is a financial model that determines the expected return on an investment by considering the risk-free rate, the market risk premium, and the stock's equity beta. In this case, the risk-free rate is given as 4.96%, the market risk premium is 7.52%, and the stock's equity beta is 1.18.

To estimate the cost of capital, we can use the formula:

1. Cost of Capital = Risk-Free Rate + (Equity Beta * Market Risk Premium)

Plugging in the given values:

1. Cost of Capital = 4.96% + (1.18 * 7.52%)
2. Cost of Capital = 4.96% + 8.8756%
3. Cost of Capital = 13.8356%

Therefore, the estimated cost of capital for AT&T common stock using the Capital Asset Pricing Model is 13.84%.