Question

Diddy Corp. stock has a beta of 1.2, the current risk-free rate is 3 percent, and the expected return on the market is 14.50 percent. What is Diddy's cost of equity? (Round your answer to 2 decimal places.) Cost of equity ___ %

Answer 1

Diddy Corp's cost of equity is 16.80%

Step-by-step explanation:

The cost of equity is calculated using the following formula:

Cost of equity = Risk-free rate + Beta*(Expected market return - Risk-free rate)

Plugging in the given values:

Cost of equity = 3% + 1.2*(14.50% - 3%)

Cost of equity = 3% + 1.2*(11.50%)

Cost of equity = 3% + 13.80%

Cost of equity = 16.80%

Therefore, Diddy Corp's cost of equity is 16.80%.