Question

The Hudson Corporation's common stock has a beta of 1.1. If the risk-free rate is 5.1 percent and the expected return on the market is 13 percent, what is the company's estimated cost of equity capital?

A. 6.66%
B. 10.01%
C. 14.85%
D. 17.15%
E. 15.24%

Answer 1

The company's estimated cost of equity capital is 13.79%.

Step-by-step explanation:

The estimated cost of equity capital can be calculated using the Capital Asset Pricing Model (CAPM). The formula for CAPM is:

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

Plugging in the values given in the question:

Cost of Equity = 5.1% + 1.1 * (13% - 5.1%) = 5.1% + 1.1 * 7.9% = 5.1% + 8.69% = 13.79%