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7 July, 11:07

The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. the beta is 1.25, 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 40%. based on the capm, what is the firm's cost of equity?

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  1. 7 July, 13:33
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    Answer: 0.1525

    Explanation:

    Given the following:

    Market average annual return (Rm) = 14.50% = 0.145

    Required return on stock (Rf) = 11.50% = 0.115

    Beta (B) = 1.25

    Using the Capm, cost of equity (Ke) is given as:

    Ke = Rf + B (Rm - Rf)

    Ke = 0.115 + 1.25 (0.145 - 0.115)

    Ke = 0.115 + 1.25 (0.03)

    Ke = 0.115 + 0.0375

    Ke = 0.1525
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