The beta for Magnolia Magnet Company's common stock is 1

Finance May 05, 2021

The beta for Magnolia Magnet Company's common stock is 1.24. The annual stock market risk premium is 7.2%, and the risk-free interest rate is 2.3% per year. According to the security market line (SML) technique, what is the company's annual percentage cost of common equity (ke) financing?

A) 11.23%

B) 8.38%

C) 9.09%

D) 10.05%

E) 8.93%

Expert Solution

Computation of the cost of common equity:-

Cost of common equity = Risk free rate + (Beta * Market risk premium)

= 2.3% + (1.24 * 7.2%)

= 2.3% + 8.93%

= 11.23%

Hence, the correct option is A) 11.23%

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