A firm has a beta of 1.2. The return in the market is 14%, and the risk-free rate is 6%. The estimated cost of common stock equity is ____.

Question

Quizplus · Accepted Answer

The estimated cost of common stock equity can be calculated using the Capital Asset Pricing Model (CAPM) formula: Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values: 6% + 1.2 * (14% - 6%) = 6% + 1.2 * 8% = 6% + 9.6% = 15.6%.

A Firm Has a Beta of 1