Question

Find the cost of equity for Consolidated Wheels and Axles Inc. using the information below: The firm's beta estimate is 0.9 The 10-year Treasury yield is 5.1% The (expected) market risk premium is 6.3% SHOW WORK HERE, HIGHLIGHT FINAL ANSWER IN YELLOW

Answer 1

r or expected rate of return = 0.1077 or 10.77%

Step-by-step explanation:

Using the CAPM, we can calculate the required/expected rate of return on a stock. This is the minimum return required by the investors to invest in a stock based on its systematic risk, the market's risk premium and the risk free rate.

The formula for required rate of return under CAPM is,

r = rRF + Beta * rpM

Where,

• rRF is the risk free rate

• rpM is the market risk premium

r = 0.051 + 0.9 * 0.063

r or expected rate of return = 0.1077 or 10.77%