Suppose that the British stock market is segmented from the rest of the world.Using the CAPM and a risk-free rate of 5 percent,estimate the equity cost of capital for Stansfield. Correlation Coefficients
Stansfield England World SD(%) $\mathcal { R }$ %
$$\begin{array} { l c c l c c }
\text { Stansfield } & 1.00 & 0.90 & 0.60 & 20 & ? \
\text { England } & & 1.00 & 0.80 & 18 & 14 \
\text { World } & & & 1.00 & 15 & 12
\end{array}$$
A)14 percent
B)12 percent
C)9 percent
D)none of the options

Question

Suppose that the British stock market is segmented from the rest of the world.Using the CAPM and a risk-free rate of 5 percent,estimate the equity cost of capital for Stansfield. Correlation Coefficients
Stansfield England World SD(%) $\mathcal { R }$ %
$$\begin{array} { l c c l c c } 
\text { Stansfield } & 1.00 & 0.90 & 0.60 & 20 & ? \
\text { England } & & 1.00 & 0.80 & 18 & 14 \
\text { World } & & & 1.00 & 15 & 12
\end{array}$$
A)14 percent
B)12 percent
C)9 percent
D)none of the options

Quizplus · Accepted Answer

The equity cost of capital for Stansfield is calculated using the CAPM formula: $ E(R_i) = R_f + \beta_i (E(R_m) - R_f) $. Since the market is segmented, we use the correlation with England. The beta for Stansfield relative to England is $ \beta = \frac{0.90 \times 20}{18} = 1 $. Thus, the equity cost of capital is $ 5\% + 1 \times (14\% - 5\%) = 14\% $.

Suppose That the British Stock Market Is Segmented from the Rest