Tip-Top Paving has a beta of 1.11, a cost of debt of 11% and a debt to value ratio of 0.6.The current risk free rate is 9% and the market rate of return is 16.18%.What is the company's cost of equity
Capital?

Question

Quizplus · Accepted Answer

We can use the Capital Asset Pricing Model (CAPM) to calculate the cost of equity:

Cost of Equity = Risk-Free Rate + Beta × (Market Rate of Return – Risk-Free Rate)

Cost of Equity = 9% + 1.11 × (16.18% – 9%)

Cost of Equity = 9% + 1.11 × 7.18%

Cost of Equity = 16.97%

Therefore, the best choice is C.

Tip-Top Paving Has a Beta of 1