The stock is currently selling for $15.25 per share, and its noncallable $1,000.00 par value, 20-year, 9.00% bonds with semiannual payments are selling for $930.41. The beta is 1.22, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 25%. Refer to Exhibit 10.1. Based on the CAPM, what is the firm's cost of equity?

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tanseershar tanseershar · Answer 1 · 2020-04-25T03:49:14+02:00

Answer:

12.8%

Explanation:

Ra=Rf+(Rm-Rf)*Ba

Ra=?

Rf=5.5%

Rm=11.5%

Ba=1.22

Ra=5.5%+(11.5%-5.5%)*1.22

Ra=12.8%

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abiolataiwo2015 abiolataiwo2015 · Answer 2 · 2021-11-03T13:27:13+01:00

Based on the CAPM, the firm's cost of equity is 13%.

Using this formula

rs = rRF + (rm -rRF) x bi

Where:

rs =Cost of equity=?

rRF=Treasury bond=5.50%

rm=Required return=11.50%

bi=beta=1.22%

Let plug in the formula

rs = 5.50% + (11.50% - 5.50%) x 1.22

rs=5.50%+(6×1.22)

rs=5.50%+7.32%

rs = 12.8%

rs=13% (Approximately)

Inconclusion based on the CAPM, the firm's cost of equity is 13%.

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