A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is ________.
A) 6 percent
B) 7.2 percent
C) 14 percent
D) 15.6 percent

Question

Quizplus · Accepted Answer

The CAPM formula to estimate the cost of common stock equity is:

Cost of Common Stock Equity = Risk-Free Rate + Beta x (Market Return - Risk-Free Rate)

Substituting the given values:

Cost of Common Stock Equity = 6% + 1.2 x (14% - 6%)

Cost of Common Stock Equity = 15.6%

Therefore, the estimated cost of common stock equity is 15.6%. Hence, the correct answer is D.

A Firm Has a Beta of 1