Question
In: Finance
If a company has a beta of 1.3, risk free rate 3% and market index return...
If a company has a beta of 1.3, risk free rate 3% and market index return 8% Q5: what is market risk premium? what is cost of equity?
Solutions
Expert Solution
Answer)
Market Risk premium = Expected rate of return - Risk free rate
Market Risk premium = 8% - 3%
Market Risk premium = 5%
Cost of equity = Risk free rate + Beta(Market Return - Risk free rate)
Cost of equity = 3% + 1.3(8% - 3%)
Cost of equity = 3% + 6.5%
Cost of equity = 9.5%
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