Tip-Top Paving has a beta of 1.11,a cost of debt of 11% and a debt to value ratio of .6.The current risk free rate is 9% and the market rate of return is 16.18%.What is the company's cost of equity capital?

Question

Quizplus · Accepted Answer

To calculate the cost of equity capital, we will use the Capital Asset Pricing Model (CAPM) formula which is:

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

Substituting the given values in the above equation, we get:

Cost of Equity Capital = 9% + 1.11*(16.18% - 9%) = 16.97%

Hence, the best choice is C) 16.97% as it correctly calculates the cost of equity capital using the CAPM formula.

Tip-Top Paving Has a Beta of 1