Overall cost of capital: What is the beta of a company whose equity has an expected return of 21.3 percent when the risk-free rate of return is 7.0 percent and the expected return on the market is 18.0 percent?
A) 0.79
B) 1.30
C) 1.57
D) none of the above

Question

Quizplus · Accepted Answer

The formula for calculating beta is:

Beta = (Expected Return on Equity - Risk-Free Rate) / Expected Return on Market - Risk-Free Rate)

Using the numbers given:

Beta = (21.3% - 7.0%) / (18.0% - 7.0%)
Beta = 14.3% / 11.0%
Beta = 1.30

Therefore, the answer is (B) 1.30.

Overall Cost of Capital: What Is the Beta of a Company