Calculate the cost of equity for Boston Industries using the following information: The cost of debt is 5%, the corporate tax rate is 40%, the rate on Treasury Bills is 3.5%, the firm has a beta of 0.8, and the expected return on the market is 12%.

Question

Quizplus · Accepted Answer

The correct answer is A because the cost of equity for Boston Industries can be calculated using the Capital Asset Pricing Model (CAPM), which states that the expected return on a stock is equal to the risk-free rate plus a risk premium. The risk premium is determined by the beta of the stock, which measures its volatility relative to the market. In this case, the risk-free rate is 3.5%, the beta is 0.8, and the expected return on the market is 12%. Therefore, the cost of equity for Boston Industries is 3.5% + 0.8 * (12% - 3.5%) = 10.3%.

Calculate the Cost of Equity for Boston Industries Using the Following