24.3k views
4 votes
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?

User Adrena
by
8.2k points

1 Answer

1 vote

Final answer:

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%.

User Rogue
by
8.6k points

No related questions found

Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories