Paul Sharp is CFO of Fast Rocket Inc

Finance Apr 25, 2021

Paul Sharp is CFO of Fast Rocket Inc. He tries to determine the cost of equity financing for his company. The stock has a beta of 1.49. Paul estimated that the market return is 8.88%. The current rate for 10-year Treasury Bonds is 2.52%. Calculate cost of common equity financing using CAPM - SML formula.

Round the answers to two decimal places in percentage form.

Expert Solution

Computation of Cost of Common Equity using CAPM-SML Formula:

Cost of Common Equity = Risk-free Rate + Beta * Market Risk Premium

= 2.52% + 1.49*(8.88% - 2.52%)

= 2.52% + 1.49*6.36%

= 2.52% + 9.48%

Cost of Common Equity = 12.00%

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