The beta of Phillips Equipment is 1

Calculation of Cost of equity for Philip's Equipment using CAPM (Capital Asset Pricing Model) :

Cost of equity = Rf + B(Rm - Rf)

Where, Rf = Risk free rate of interest  

B = Beta of security

Rm = Expected return of the market

Hence by given information,

Rf = 3% or 0.03

B = 1.2

Risk premium = Rm - Rf = 7% or 0.07

* Risk premium is a rate of return of the market greater than the risk free rate.

Therefore, Rm = Risk premium + Rf

= 7% + 3% = 10% or 0.1

Hence,

Cost of equity (using CAPM) = Rf + B(Rm-Rf)

= 0.03 + 1.2(0.1-0.03)

= 0.03 + 1.2(0.07)

= 0.03 + 0.084

= 0.114 or 11.40%