Question

Steady​ Company's stock has a beta of 0.21. If the​ risk-free rate is 6.1% and the market risk premium is 7.2%​, what is an estimate of Steady​ Company's cost of​ equity? (Round to one decimal​ place.)

Answer 1

Using the Capital Asset Pricing Model (CAPM), the estimated cost of equity for Steady Company is 7.6%, calculated by taking the risk-free rate of 6.1% plus the product of its beta (0.21) and the market risk premium (7.2%).

Step-by-step explanation:

The student is asking how to estimate the cost of equity for Steady Company using its beta, the risk-free rate, and the market risk premium. This can be answered using the Capital Asset Pricing Model (CAPM), a concept in finance. To calculate the cost of equity, the formula is: Cost of Equity = Risk-Free Rate + (Beta × Market Risk Premium). Plugging in Steady Company's beta of 0.21, a risk-free rate of 6.1%, and a market risk premium of 7.2%, the equation becomes:

Cost of Equity = 6.1% + (0.21 × 7.2%)
= 6.1% + 1.512%
= 7.612%

Rounding to one decimal place gives us a cost of equity of 7.6% for Steady Company. This is a simplified method of estimating how much it costs for Steady Company to use equity financing, taking into account the time value of money and risk.