J firm issues preferred dividends at an annual rate of $5.62. Its current preferred stock price...

J firm issues preferred dividends at an annual rate of $5.62. Its current preferred stock price is $26.67. Assume that the equity beta for JJ is 0.95. The Yield on 10-year treasuries is 3.41%, and that the market risk premium for the year is 6%. The company's EPS expected growth is 2%. For this year, the dividends for JJ firm are the same for common and preferred stock; additionally the price for common stock is $33. What is the common cost of equity for JJ Firm using the CAPM method?

Expert Solution

As per CAPM Method,

where, rf = Risk free return or 10-year Treasury yield = 3.41%

Rmp = Market Risk Premium = 6%

Beta of JJ firm = 0.95

Required rate of Return = 3.41% + 0.95(6%)

Required rate of Return = 9.11%

So, the common cost of equity for JJ Firm using the CAPM method is 9.11%

jeff jeffy answered 2 years ago

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