Overall cost of capital: If the market risk premium is currently 6 percent and the risk-free rate of return is 4 percent, then what is the expected return on a common share with a beta equal to 2?

Question

Quizplus · Accepted Answer

First, we need to use the Capital Asset Pricing Model (CAPM) to calculate the expected return on the common share.

Expected Return = Risk-Free Rate + (Beta x Market Risk Premium)
Expected Return = 4% + (2 x 6%) 
Expected Return = 4% + 12% 
Expected Return = 16%

Therefore, the answer is D) 16.0%.

Overall Cost of Capital: If the Market Risk Premium Is