The common stock of Contemporary Interiors has a beta of 1.13 and a standard deviation of 21.4 percent.The market rate of return is 12.7 percent and the risk-free rate is 4.1 percent.What is the cost of equity for this firm?

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model:
Cost of Equity = Risk-Free Rate + Beta*(Market Rate of Return - Risk-Free Rate)
Cost of Equity = 4.1% + 1.13*(12.7% - 4.1%)
Cost of Equity = 4.1% + 1.13*8.6%
Cost of Equity = 4.1% + 9.74%
Cost of Equity = 13.82% 
Therefore, the cost of equity for the firm is 13.82 percent. Hence, option A is the correct choice.

The Common Stock of Contemporary Interiors Has a Beta of 1.13