Your estimate of the market risk premium is 6%. The risk-free rate of return is 4.5% and General Motors has a beta of 1.6. What is General Motors' cost of equity capital?

Question

Quizplus · Accepted Answer

The cost of equity capital can be calculated using the Capital Asset Pricing Model (CAPM):
Cost of equity = risk-free rate + beta x market risk premium
Cost of equity = 4.5% + 1.6 x 6%
Cost of equity = 4.5% + 9.6%
Cost of equity = 14.1% 
Therefore, the answer is B (14.1%).

Your Estimate of the Market Risk Premium Is 6