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Aluminum maker Alcoa has a beta of about 1
Aluminum maker Alcoa has a beta of about 1.25?, whereas Hormel Foods has a beta of 1.73. If the expected excess return of the market portfolio is 3%?, which of these firms has a higher equity cost of? capital, and how much higher is? it?
The firm that has the higher equity cost of capital is ?
Alcoa
Hormel Foods
by
nothing
?%. ?(Select from the? drop-down menu and round to two decimal? places.)
Expert Solution
Computation of Equity Cost of Capital:
Cost of Capital = Beta * Excess Return of the Market Portfolio
Cost of Capital of Alcoa = 1.25 * 3% = 3.75%
Cost of capital of Hormel Foods = 1.73 * 3% = 5.19%
So, from the above calculation, it can be seen that the firm Hormel Foods has the higher equity cost of capital by 1.44% (5.19%- 3.75%).
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