Question

The yield on a three-month T-bill is 4%, the yield on a 10-year T-bond is 5.36%. the market risk premium is 10.18%. and the Allen Company has a beta of 1.25. Using the Capital Asset Pricing Model (CAPM) approach, Allen’s cost of equity is:_______

Answer 1

Answer: 18.09%

Step-by-step explanation:

Capital Asset Pricing Model = Risk free rate + beta * Market premium

= 5.36% + 1.25 * 10.18%

= ‭0.18085‬

= 18.09%

Note: Use the yield on a 10-year T-bond as long term risk free rates take into account more volatility.