Question

The Dybvig Corporation’s common stock has a beta of 1.5. If the risk-free rate is 4.6 percent and the expected return on the market is 12 percent, what is Dybvig’s cost of equity capital?

Answer 1

Dybvig’s cost of equity capital is 15.7%

Step-by-step explanation:

Capital asset pricing model measure the expected return on an asset or investment. it is used to make decision for addition of specific investment in a well diversified portfolio.

Formula for CAPM

Cost of Capital = Risk free rate + beta ( market return - risk free rate )

Cost of Capital = Rf + β ( Rm - Rf )

Cost of Capital = 4.6% + 1.5 ( 12% - 4.6% )

Cost of Capital = 15.7%