Brien Inc. has the following data: RRF = 3.65%; RPM = 7.40%; and beta = 1.15. What is the firm's cost of equity from retained earnings based on the CAPM?

a. 12.16%

b. 14.24%

c. 9.20%

d. 10.74%

Solutions

Expert Solution

The option (a) is right option.

Explanation:

As per CAPM

cost of equity = risk free rate + beta*market risk premium

risk free rate = RRF = 3.65%

market risk premium = RPM = 7.4%

beta = 1.15

= 3.65 + 1.15*7.4

= 12.16%

Hence, the (a) is correct option.

Hence, (a) is correct.

Nabeel answered 1 year ago

Next > < Previous

Related Solutions

The Cost of Capital: Cost of Retained Earnings The cost of common equity is based on...

The Cost of Capital: Cost of Retained Earnings The cost of common equity is based on the rate of return that investors require on the company's common stock. New common equity is raised in two ways: (1) by retaining some of the current year's earnings and (2) by issuing new common stock. Equity raised by issuing stock has a(n) cost, re, than equity raised from retained earnings, rs, due to flotation costs required to sell new common stock. Some argue...

based on the CAPM what should be the beta of beta of a stock that has...

based on the CAPM what should be the beta of beta of a stock that has an expected return of 12%, if the risk free is 3.5% and expected return of market portfolio is 12%?

Coronado Inc. has retained earnings of $780000 and total stockholders’ equity of $2100000. It has 302000...

Coronado Inc. has retained earnings of $780000 and total stockholders’ equity of $2100000. It has 302000 shares of $5 par value common stock outstanding, which is currently selling for $30 per share. If Coronado declares a 10% stock dividend on its common stock: net income will decrease by $151000. retained earnings will decrease by $151000 and total stockholders’ equity will increase by $151000. retained earnings will decrease by $906000 and total paid-in capital will increase by $906000. retained earnings will...

What is a firm's weighted-average cost of capital if the stock has a beta of 1.5,...

What is a firm's weighted-average cost of capital if the stock has a beta of 1.5, Treasury bills yield 3%, and the market portfolio offers an expected return of 8%? Debt that has a yield to maturity of 7.5%. The firm is in the 25% marginal tax bracket. The cost of preferred stock is 8%. The following are the market values of 1) debt $8million, 2) preferred stock $6million. The company has 1,500,000 shares and the current market price of...

What is a firm's weighted-average cost of capital if the stock has a beta of 1.45,...

What is a firm's weighted-average cost of capital if the stock has a beta of 1.45, Treasury bills yield 5%, and the market portfolio offers an expected return of 14%? In addition to equity, the firm finances 30% of its assets with debt that has a yield to maturity of 9%. The firm is in the 35% marginal tax bracket.

What is a firm's weighted-average cost of capital if the stock has a beta of 2.45,...

What is a firm's weighted-average cost of capital if the stock has a beta of 2.45, Treasury bills yield 5%, and the market portfolio offers an expected return of 14%? In addition to equity, the firm finances 30% of its assets with debt that has a yield to maturity of 9%. The firm is in the 35% marginal tax bracket. A proposed capital project will cost $20 million and generate $4 million annually in after-tax cash flows for 6 years....

What is a firm's weighted-average cost of capital if the stock has a beta of 1.1,...

What is a firm's weighted-average cost of capital if the stock has a beta of 1.1, Treasury bills yield 4%, and the market portfolio offers an expected return of 16%? In addition to equity, the firm finances 70% of its assets with debt that has a yield to maturity of 10%. The firm is in the 35% marginal tax bracket.

What is a firm's weighted-average cost of capital if the stock has a beta of 1.1,...

The following data are from the accounts of Color Corp. at December 31, 2020 Retained earnings,...

The following data are from the accounts of Color Corp. at December 31, 2020 Retained earnings, beginning balance--------------------------------------------------------- $900,000 Common stock, $____ par, 100,000 shares authorized, 50,000 shares issued -----------------1,000,000 Treasury stock, 1,000 shares --------------------------------------------------------------------20,000 Paid-in capital in excess of par – Common stock ---------------------------------------------400,000 Bonds Payable ----------------------------------------------------------------------------------200,000 Net income for 2020 (not included in retained earnings above)-----------------------------190,000 Dividends declared and paid during 2020 (not included in retained earnings above)-------80,000 Required: Determine the value of the following items. Type/write your...

Statement of retained earnings. Use the data from the following financial statements in the popup window,...

Statement of retained earnings. Use the data from the following financial statements in the popup window, LOADING.... The company paid interest expense of $ 18 comma 400 for 2017 and had an overall tax rate of 40 % for 2017. Complete the statement of retained earnings for 2017, and determine the dividends paid last year. Partial Income Statement Year Ending 2017 Sales revenue $350,000 Cost of goods sold $142,000 Fixed costs $43,200 Selling, general, and administrative expenses $27,800 Depreciation $46,200...

Subjects