Question

Hampton corporation has a beta of 1.9 and a marginal tax rate of 21%. the expected return on the market is 13% and the risk-free interest rate is 3.52%. estimate the firm’s cost of internal equity.

Answer 1

The cost of internal equity for Hampton Corporation is estimated using the CAPM formula. With a risk-free rate of 3.52%, beta of 1.9, and expected market return of 13%, the cost of equity is calculated to be 21.532%.

Step-by-step explanation:

The student is asking for an estimate of Hampton Corporation's cost of internal equity. To calculate this, we use the Capital Asset Pricing Model (CAPM), which is given by:

Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)

In the provided question, the risk-free rate is 3.52%, beta is 1.9, and the expected market return is 13%. Plugging these values into the CAPM formula gives us:

Cost of Equity = 3.52% + 1.9 * (13% - 3.52%)

Cost of Equity = 3.52% + 1.9 * 9.48%

Cost of Equity = 3.52% + 18.012%

Cost of Equity = 21.532%

Therefore, the estimate for the firm's cost of internal equity is 21.532%%, assuming the beta of 1.9, the marginal tax rate of 21%, the expected return on the market of 13%, and the risk-free interest rate of 3.52%.