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26 December, 15:22

The Nixon Corporation's common stock has a beta of 1.3. If the risk-free rate is 4.4 percent and the expected return on the market is 10 percent, what is the company's cost of equity capital?

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  1. 26 December, 18:21
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    11.68%

    Explanation:

    In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

    Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

    = 4.4% + 1.3 * (10% - 4.4%)

    = 4.4% + 1.3 * 5.6%

    = 4.4% + 7.28%

    = 11.68%

    The (Market rate of return - Risk-free rate of return) is also called market risk premium
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