A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals6 percent. The estimated cost of common stock equity is

Question

Quizplus · Accepted Answer

The estimated cost of common stock equity is equal to the risk-free rate plus the product of the market risk premium and the firm's beta.

Cost of equity = Rf + (Rm - Rf) x beta
Cost of equity = 6 + (14 - 6) x 1.2
Cost of equity = 15.6%

A Firm Has a Beta of 1