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%.