xy Corporation has a beta coefficient of 0

Finance Aug 12, 2020

xy Corporation has a beta coefficient of 0.88. Estimate its cost of equity if the risk free rate is 4% and return on the broad market index is 8% Select one: a. 4% b.8% O c. 7.6% O d. 7.52%

Expert Solution

Solution :-

Beta coefficient (B) = 0.88

Risk free rate (Rf) = 4%

Return on market index (Rm) = 8%

Cost of equity is to be calculated using Capital Asset Pricing Model (CAPM) :-

Cost of Equity ( r ) :-

= Rf + Beta ( Rm - Rf )

= 4% + 0.88 ( 8% - 4% )

= 4% + 0.88 ( 4%)

= 4% + 3.52%

= 7.52%

so, cost of equity is (d ) 7.52%

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