Assume the firm size premium for a firm with a market value of $20 million is 7.2%. Also, assume the risk-free rate of return, equity premium, and $\beta$ are 5.0%, 5.5%, and 1.75 respectively. The firm's cost of equity using the CAPM method adjusted for firm size is 21.8%.

Question

Quizplus · Accepted Answer

We can use the following formula to calculate the firm's cost of equity using the CAPM method adjusted for firm size:
Cost of equity = risk-free rate + (equity premium * F1F1F1S1F1F1F10) + firm size premium
Plugging in the given values, we get:
Cost of equity = 5.0% + (5.5% * 1.75) + 7.2% = 21.8%
Therefore, the statement is true.

Assume the Firm Size Premium for a Firm with a Market