Assuming the CAPM or one-factor model holds, what is the cost of equity for a ﬁrm if the ﬁrm's equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is 9%,
And the return to the company's debt is 7%?

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the CAPM formula: Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values: 2% + 1.2 * (9% - 2%) = 2% + 1.2 * 7% = 2% + 8.4% = 10.4%.

Assuming the CAPM or One-Factor Model Holds, What Is the Cost