Your estimate of the market risk premium is 6%.The risk-free rate of return is 4.5% and General Motors has a beta of 1.6.What is General Motors' cost of equity capital?

Question

Quizplus · Accepted Answer

The correct answer is A. The cost of equity capital is calculated using the Capital Asset Pricing Model (CAPM), which states that the expected return on an asset is equal to the risk-free rate plus a risk premium that is proportional to the asset's beta. In this case, the risk-free rate is 4.5%, the market risk premium is 6%, and General Motors' beta is 1.6. Therefore, General Motors' cost of equity capital is 4.5% + 6% * 1.6 = 14.1%.

Your Estimate of the Market Risk Premium Is 6