Question

Suppose a firm has a beta of 1.5.The market risk premium is expected to be 8%, and the current risk-free rate is 2%. Suppose a firm has a beta of 1.5.The market risk premium is expected to be 8%, and the current risk-free rate is 2%. The firm maintains a constant growing dividend policy that grows at 5% per year ; the most recent dividend was $1.8. Currently stock price is $21. Multiple Choice To find cost of equity using SML/CAPM model, R(E)=2%+1.5*8% To find cost of equity using SML/CAPM model, R(E)=2%+1.5*(8%-2%)

Answer 1

cost of equity as per SML/CAPM model=risk free rate+Beta*market risk premium

=2+(1.5*8)

=14%

Hence the correct option is:

R(E)=2%+1.5*8%