Question

Miller Inc. has an overall beta of 0.79 and a cost of equity of 11.2 percent for the firm overall. The firm is 100 percent financed with common stock. Division A within the firm has an estimated beta of 1.08 and is the riskiest of all of the firm's operations. What is an appropriate cost of capital for division A if the market risk premium is 9.5 percent?

Answer 1

Ra=21.5%

Step-by-step explanation:

Ra=Rf+(Rm-Rf)*Ba

Where Ra=?

Rf=11.2%

Rm-Rf=9.5%

Ba=1.08

Ra=11.2%+(9.5%)*1.08

Ra=11.2%+10.3%

Ra=21.5%