Your firm is planning to invest in a new power generation system.Galt Industries is an all-equity firm that specializes in this business.Suppose Galt's equity beta is 0.75,the risk-free rate is 3%,and the market risk premium is 6%.If your firm's project is all-equity financed,then your estimate of your cost of capital is closest to:
A)5.25%.
B)6.00%.
C)6.75%.
D)7.50%.

Question

Quizplus · Accepted Answer

The cost of capital can be estimated using the Capital Asset Pricing Model (CAPM): Cost of Capital = Risk-Free Rate + Beta * Market Risk Premium = 3% + 0.75 * 6% = 7.50%.

Your Firm Is Planning to Invest in a New Power