Question

The shoe co. has a beta of 1.29. the risk-free rate of return is 4.3 percent and the expected return on the market is 12.5 percent. what is the cost of equity?

-10.58 percent
-14.88 percent
-16.13 percent
-20.43 percent

Answer 1

The cost of equity for The Shoe Co. can be calculated using the CAPM equation, resulting in a cost of equity of 14.88 percent.

Step-by-step explanation:

To calculate the cost of equity for The Shoe Co., we can use the Capital Asset Pricing Model (CAPM), which is represented by the equation:

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

Given that the Shoe Co. has a beta of 1.29, the risk-free rate is 4.3 percent, and the expected return on the market is 12.5 percent, we can plug these numbers into the equation:

Cost of Equity = 4.3% + (1.29 * (12.5% - 4.3%))

Cost of Equity = 4.3% + (1.29 * 8.2%)

Cost of Equity = 4.3% + 10.58%

Cost of Equity = 14.88%

Therefore, the cost of equity for The Shoe Co. is 14.88 percent.