The U.S. risk-free rate is currently 3 percent. The expected U.S. market return is 10 percent. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?
A) 8.4 percent
B) 11.4 percent
C) 10.0 percent
D) None of these are correct.

Question

Quizplus · Accepted Answer

The cost of dollar-denominated equity is given by the capital asset pricing model (CAPM) as follows:
Cost of Equity = Risk-Free Rate + Beta*(Expected Market Return - Risk-Free Rate)
Plug in the given values:
Cost of Equity = 3% + 1.2*(10% - 3%)
Cost of Equity = 3% + 1.2*7%
Cost of Equity = 11.4%
Therefore, the correct choice is B, 11.4 percent.

The US Risk-Free Rate Is Currently 3 Percent