Allegheny Valley Power Company common stock has a beta of 0.80. If the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of retained earnings for the firm (using the CAPM).

Question

Quizplus · Accepted Answer

The cost of retained earnings can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: 6.5% + 0.80 * (16% - 6.5%) = 6.5% + 0.80 * 9.5% = 6.5% + 7.6% = 14.1%.

Allegheny Valley Power Company Common Stock Has a Beta of 0.80