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The Tubby Ball Corporation's common stock has a beta of 1
The Tubby Ball Corporation's common stock has
a beta of 1.15. If the risk-free rate is 5 percent and the expected return on the
market is 12 percent, what is Tubby Ball's cost of equity capital?
Expert Solution
Computation of Cost of Equity Capital using CAPM:
Cost of Equity Capital = Risk-free Rate + Beta * Market Risk Premium
= 5% + 1.15*(12%-5%)
= 5% + 8.05%
Cost of Equity Capital = 13.05%
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