Sonderson Corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The rate on 10 year T-Bonds is 1.6% and the return on the S&P 500 index is 8%. What is the appropriate cost of common equity in determining the firm's cost of capital?

Question

Quizplus · Accepted Answer

The appropriate cost of common equity using the capital asset pricing model (CAPM) is: Cost of Equity = Risk-free rate + Beta*(Market return - Risk-free rate) = 1.6% + 1.5*(8% - 1.6%) = 11.2%. Therefore, the answer is B.

Sonderson Corporation Is Undertaking a Capital Budgeting Analysis