Question

The risk free rate is 5%

The expected return on the market is 12%
A company has a Beta factor of 0.9.
What is the cost of capital ke for the company?

Answer 1

The company's cost of capital ke was calculated using the Capital Asset Pricing Model (CAPM) with a given risk-free rate of 5%, an expected return on the market of 12%, and a beta of 0.9. The resulting cost of capital ke is 11.3%.

Step-by-step explanation:

To calculate the cost of capital ke for the company using the Capital Asset Pricing Model (CAPM), we use the given risk-free rate, expected return on the market, and the company's beta factor.

The formula for CAPM is:

ke = Risk-free rate + Beta × (Expected return on the market - Risk-free rate).

Using the provided information:

risk-free rate = 5%

expected return on the market = 12%

Beta = 0.9

We plug these values into the formula:

ke = 5% + 0.9 × (12% - 5%)

ke = 5% + 0.9 × 7%

ke = 5% + 6.3%

ke = 11.3%

Therefore, the company's cost of capital ke is 11.3%.