Jet Setters has a cost of equity of 17.8 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?

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Quizplus · Accepted Answer

The acquisition will increase the company's beta, which will increase the company's cost of equity capital. The new cost of equity capital can be calculated using the CAPM:Cost of equity = Risk-free rate + Beta * Market risk premiumCost of equity = 4.4% + 1.6 * 10.2%Cost of equity = 20.72%The acquisition will increase the company's cost of equity capital by 2.92%.

Jet Setters Has a Cost of Equity of 17