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11 April, 23:20

The Allegheny Valley Power Company common stock has a beta of 0.80. Assume the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM).

a. 14.1%b. 7.6%c. 6.5%d. 13.0%

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  1. 12 April, 03:04
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    correct option is a. 14.1%

    Explanation:

    given data

    beta = 0.80

    current risk-free rate = 6.5%

    expected return = 16%

    solution

    we get here cost of equity capital that is express as

    cost of equity capital = current risk-free rate + beta (expected return - current risk-free rate) ... 1

    put here value ans we will get cost of equity capital

    cost of equity capital = 6.5% + 0.8 (16% - 6.5%)

    solve it we get

    cost of equity capital = 14.1%

    so correct option is a. 14.1%
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