Trendsetters has a cost of equity of 18.1 percent.The market risk premium is 10.2 percent and the risk-free rate is 4.4 percent.The company is acquiring a competitor,which will increase the company's beta to 1.6.What effect,if any,will the acquisition have on the firm's cost of equity capital?

Question

Quizplus · Accepted Answer

R_E = 0.044 + 1.6(0.102) = 20.72 percentIncrease in cost of equity = 20.72 percent - 18.1 percent = 2.62 percent

Trendsetters Has a Cost of Equity of 18