Calculate the cost of equity for Boston Industries using the following information: The cost of debt is 7%,the corporate tax rate is 40%,the rate on Treasury Bills is 4%,the firm has a beta of 1.1,and the expected return on the market is 12%.

Question

Quizplus · Accepted Answer

The cost of equity for Boston Industries can be calculated using the Capital Asset Pricing Model (CAPM) as follows:

Cost of equity = Risk-free rate + (Beta x Market risk premium)

Risk-free rate = Rate on Treasury Bills = 4%
Market risk premium = Expected return on the market - Risk-free rate = 12% - 4% = 8%
Beta = 1.1

Cost of equity = 4% + (1.1 x 8%) = 12.8%

Therefore, the best choice is A) 12.8%, which is the calculated cost of equity.

Calculate the Cost of Equity for Boston Industries Using the Following