Question

The common stock of ABC, Inc., has a beta of 1.13 and a standard deviation of 21.4 percent. The market rate of return is 12.7 percent and the risk-free rate is 4.1 percent. What is the cost of equity for this firm

Answer 1

The appropriate answer is "13.82%".

Step-by-step explanation:

Given:

Risk free rate,

`R_f=4.10`

Beta of stock,

`\beta=1.13`

Market rate,

=
`12.7`

Now,

The market risk premium will be:

⇒
`R_p` =
`Market \ rate-Risk \ free \ rate`

=
`12.7-4.1`

=
`8.60` (%)

hence,

The cost of equity will be:

⇒
`r=R_f+\beta* R_p`

`=4.10+1.13* 8.60`

`=4.10+ 9.718`

`=13.82` (%)