The cost of equity for Shaky Building Supply is approximately 15.16 percent, calculated using the Capital Asset Pricing Model with the given risk-free rate, market risk premium, and beta. The correct option is d. 15.16 percent.
The cost of equity (Re) can be calculated using the Capital Asset Pricing Model (CAPM):
Re = Rf + β(Rm - Rf),
where:
Rf is the risk-free rate,
β is the beta of the stock,
Rm is the expected market return.
Given:
Risk-free rate (Rf) = 3.3%,
Market risk premium (Rm - Rf) = 9.56%,
Beta (β) = Market beta + (Market beta * Beta differential percentage) = Market beta + (0.22 * Market beta).
Calculate β:
β = 1 + (0.22 * 1) = 1.22.
Now, substitute these values into the CAPM formula:
Re = 3.3 + 1.22 * 9.56 = 15.16%
Therefore, the cost of equity for Shaky Building Supply is approximately 15.16 percent, matching option d.
The correct option is d. 15.16 percent.