Tidewater Fishing has a current beta of 1.16. The market risk premium is 6.8 percent and the risk-free rate of return is 2.9 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.18?

increase in cost of equity Ke = 0.14%

Explanation:

given data

current beta = 1.16

market risk premium = 6.8 percent

risk-free rate of return = 2.9 percent

beta rises = 1.18

solution

we get cost of equity when beta β is 1.16

cost of equity Ke = Rf + β (Rm - Rf) ... 1

cost of equity Ke = 2.9 % + 1.16 (6.8%)

cost of equity Ke = 10.788 %

and

cost of equity when beta is 1.18

cost of equity Ke = 2.9 % + 1.18 (6.8 %)

cost of equity Ke = 10.924 %

so that

increase in cost of equity Ke = 10.924 % - 10.788 %

so increase in cost of equity Ke = 0.136

increase in cost of equity Ke = 0.14%