Alabaster Incorporated has a beta of 1.05,a cost of debt of 8% and a debt to value ratio of .7. The current risk free rate is 3% and the market rate of return is 12.5%. What is the company's cost of equity capital?

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of capital for the company's debt:

Cost of Debt = 8%

Next, we can use the debt-to-value ratio to determine the equity component of the capital structure:

Equity-to-value ratio = 1 - debt-to-value ratio = 1 - 0.7 = 0.3

Now we can calculate the cost of equity using the CAPM formula:

Cost of Equity = Risk-Free Rate + Beta * (Market Rate of Return - Risk-Free Rate)

Cost of Equity = 3% + 1.05 * (12.5% - 3%) = 12.97%

Therefore, the answer is C (12.97%).

Alabaster Incorporated Has a Beta of 1