A firm plans to raise $4 million by issuing common stock. The firm's stock has a beta coefficient of 1.5, the risk-free interest rate is 8 percent, the average rate of return on stocks is 10 percent, and the marginal tax rate is 40 percent. What is the firm's cost of equity capital?

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM): Cost of Equity = Risk-free rate + Beta * (Market return - Risk-free rate). Substituting the given values: 8% + 1.5 * (10% - 8%) = 11%.

A Firm Plans to Raise $4 Million by Issuing Common