Question

In: Finance

A company owns common stocks with a beta coefficient of 1.2. If the cost of equity...

A company owns common stocks with a beta coefficient of 1.2. If the cost of equity is 13% and the expected market return is 11% what is the risk-free rate?

Solutions

Expert Solution

Given

Beta= 1.2

Cost of equity = 13%

E(Rm)= 11%

Using CAPM

13%= risk free rate + 1.2(11- risk free rate)

solving for risk free rate

risk free rate = 1%


Related Solutions

A beta coefficient of 1.2 represents an asset that Is less responsive than market portfolio Has...
A beta coefficient of 1.2 represents an asset that Is less responsive than market portfolio Has the same response as the market portfolio Up is unaffcted by the market movement Is more responsive that the market portfolio
What is the Model commonly used to calculate the cost of equity (common stocks)? a. Black...
What is the Model commonly used to calculate the cost of equity (common stocks)? a. Black and Scholes Pricing Model b. Arbitrage Pricing Model c. Capital Asset Pricing Model d. Miller and Modigliani Model
I currently own a portfolio of stocks worth $10 million that has a beta of 1.2.  It...
I currently own a portfolio of stocks worth $10 million that has a beta of 1.2.  It has perfect positive correlation with the S&P500 index.  The risk-free rate is 3%, and the market risk premium for the S&P500 is 8%.  The S&P500 is currently valued at 2500.  The notional value of one contract is $250*S&P value. Calculate the one-year futures price on the S&P500 index. If I want to own a risk-free bond instead of the index, explain how I can do this without...
Common Stock (with beta 1.2) $7,000,000 Debt $3,000,000 Preferred Stock (Price $100 per share; flotation cost...
Common Stock (with beta 1.2) $7,000,000 Debt $3,000,000 Preferred Stock (Price $100 per share; flotation cost $2 per share) $2,000,000 Yield to Maturity 6% Corporate tax rate 30% Preferred stock dividend $4 Risk free rate 5% Market rate of return 12%       Required: Given the above information, calculate the weighted average cost of capital (WACC) for Big Mart Inc. Why it is important for Big Mart Inc. to calculate WACC?
• Standard Deviation and Variance • The CAPM • Beta Coefficient • Common Stock Valuation Models...
• Standard Deviation and Variance • The CAPM • Beta Coefficient • Common Stock Valuation Models • Company Valuations Develop a 300-500 word informational essay about one of the topics
A company has found that its common equity capital shares have a beta equal to 1.5...
A company has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 % and the expected return on the market is 14 %. It has 7-year semiannual maturity bonds outstanding with a price of $767.03 that have a coupon rate of 7 %. It has preferred stock that sells for $25 and pays a dividend of $4. The firm is financed with $120,000,000 of common shares (market value), $45,000,000 of...
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity....
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$64.19. The firm just recently paid a dividend of ​$4.04. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just ​$2.99. After underpricing and flotation​ costs, the firm expects to net $58.41 per share on a new issue. A. Determine average annual dividend growth rate over the past 5 years. Using that growth​...
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity....
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The firm's stock is currently selling for $41.16. The firm just recently paid a dividend of $3.97. The firm has been increasing dividends regularly. Five years ago, the dividend was just $2.99. After underpricing and flotation costs, the firm expects to net $38.28 per share on a new issue. a. Determine average annual dividend growth rate over the past 5 years. Using that growth...
Cost of common stock equity   Ross Textiles wishes to measure its cost of common stock equity....
Cost of common stock equity   Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$65.88. The firm just recently paid a dividend of ​$3.98. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just ​$3.04. After underpricing and flotation​ costs, the firm expects to net ​$61.93 per share on a new issue. a.  Determine average annual dividend growth rate over the past 5 years. Using that growth​...
Beta coefficient Given the following information, determine the beta coefficient for Stock L that is consistent...
Beta coefficient Given the following information, determine the beta coefficient for Stock L that is consistent with equilibrium:  = 14.75%; rRF = 3.15%; rM = 8.5%. Round your answer to two decimal places.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT