Trendsetters has a cost of equity of 14.6 percent.The market risk premium is 8.4 percent and the risk-free rate is 3.9 percent.The company is acquiring a competitor, which will increase the company's beta to 1.4.What effect, if any, will the acquisition have on the firm's cost of equity capital?

Question

Quizplus · Accepted Answer

The acquisition increases the company's beta, which in turn increases the cost of equity. The new cost of equity can be calculated using the CAPM formula: Cost of Equity = Risk-free rate + Beta * Market risk premium. The increase in beta from the acquisition results in an increase of 1.06 percent in the cost of equity.

Trendsetters Has a Cost of Equity of 14