Tidewater Fishing has a current beta of 1.16. The market risk premium is 6.8 percent and the risk-free rate of return is 2.9 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.18?

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Quizplus · Accepted Answer

The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Cost of Equity = Risk-Free Rate + Beta * Market Risk Premium. Initially, the cost of equity is 2.9% + 1.16 * 6.8% = 10.808%. If the beta increases to 1.18, the new cost of equity becomes 2.9% + 1.18 * 6.8% = 10.924%. The increase in the cost of equity is 10.924% - 10.808% = 0.116% or approximately .14 percent.

Tidewater Fishing Has a Current Beta of 1