The cost of equity: RadicalVenOil Ltd has a cost of equity capital equal to 22.8 percent. If the risk-free rate of return is 10 percent and the expected return on the market is 18 percent, then what is the company's beta if the company's company tax rate is 35 percent?

Question

Quizplus · Accepted Answer

The cost of equity is calculated using the Capital Asset Pricing Model (CAPM), which is:

Cost of equity = Risk-free rate + Beta (Expected market return - Risk-free rate)

Given the cost of equity is 22.8%, the risk-free rate is 10%, and the expected market return is 18%, we can solve for beta:

22.8% = 10% + Beta (18% - 10%)
12.8% = Beta * 8%
Beta = 12.8% / 8%
Beta = 1.6

Since the company's tax rate is given as 35%, it does not impact the calculation of beta. Therefore, the correct answer is C) 1.60.

The Cost of Equity: RadicalVenOil Ltd Has a Cost of Equity