Thermacorp is in the heating and cooling industry and has total assets of $20 million,with stockholders' equity of $15 million,an ROE of 17.3%,and a firm Beta of 1.6.If the risk free rate of return is 4 and the market rate of return is 10,what is the cost of equity?
A) 19.6
B) 7.75
C) 13.6
D) 25.28

Question

Quizplus · Accepted Answer

Using the formula:

Cost of equity = Risk-free rate + (Market rate of return - Risk-free rate) x Beta

We can calculate the cost of equity as:

Cost of equity = 4 + (10 - 4) x 1.6
Cost of equity = 4 + 9.6
Cost of equity = 13.6

Therefore, the best choice that matches the calculated cost of equity is C.

Thermacorp Is in the Heating and Cooling Industry and Has