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Homework answers / question archive / Complete problem: Cost of Equity-CAPM XYZ, Inc
Complete problem: Cost of Equity-CAPM XYZ, Inc. has a beta of 0.8. The yield on a 3-month T-bill is 4%, and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM? Show your work.
Computation of Cost of Common Equity using the CAPM:
Cost of Common Equity = Risk-free Rate + Beta*Market Risk Premium
Here,
Risk-free Rate = 6% (always consider 10 year bond rate for risk free rate
Beta = 0.8
Market Risk Premium = 5.5%
Cost of Common Equity = 6% + 0.8*5.5% = 10.40%
