Kirchner Exports has a beta of 1.2. The risk free rate is 5% and the return on an average stock is 10.6%. Estimate Kirchner's cost of retained earnings.

Question

Quizplus · Accepted Answer

The cost of retained earnings can be estimated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: 5% + 1.2 * (10.6% - 5%) = 5% + 1.2 * 5.6% = 5% + 6.72% = 11.72%.

Kirchner Exports Has a Beta of 1