In: Finance
The common stock of ABC, Inc. has a beta of 0.68 and a standard deviation of 18.02%. The expected return on the market is 19.51% and the risk-free rate is 3.87%. What is the cost of equity for this firm?
As per CAPM model:
Re= Rf+(Rm-Rf)B
Re= required rate of return.
Rf= Risk-free rate. 3.87%
Rm = return on the market. 19.51%
Rm-Rf =Market Risk Premium.
B = Beta, systematic risk, 0.68
Re= 3.87% + 19.51%*0.68
Re = 17.14%
Cost of equity = 17.14%