Apple Inc

Economics Nov 25, 2020

Apple Inc. (AAPL) has a current beta of 1.0. The market risk premium is 4 percent and the risk-free rate of return is 3 percent. By how much will the cost of equity change if Apple Inc. company expands their operations such that their company beta decreases to 0.85?

Expert Solution

Given,

Beta= 1

Market risk premium= 4%

Risk free rate of return= 3%

Cost of equity= 3%+ 1* (4%)

= 7.00%

Decreased Beta= 0.85

So,

Cost of equity= 3%+ 0.85* (4%)

= 6.40%

Decrease in cost of equity= 7%- 6.4%

= 0.60%

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