Answer:
Cost of equity capital is 10.40 %.
Step-by-step explanation:
CAPM stands for Capital Assets Pricing Model. It is used by the investor to measure the cost of equity capital. It is commonly used for measuring expected rate return of financial securities/stocks for given level of risk associated with it.
Mathematically, Cost of shareholder equity can be calculated as follow ;
Cost of Shareholder equity = Risk free rate + (Beta of stock x Market Risk Premium) ------- (a)
Risk free rate or T- bills rate = 4 %
Beta of Stock = 0.80
Market risk Premium = 8 %
By putting the values in equation (a)
Cost of shareholder equity or equity capital = 4 % + 0.80 x 8 %
Cost of equity capital = 10.4 % .