Use the following information to answer the following question(s).
Berlioz Inc.is trying to estimate its cost of ordinary equity,and it has the following information.The firm has a beta of 0.90,the before-tax cost of the firm's debt is 7.75%,and the firm estimates that the risk-free rate is 4% while the current market return is 12%.Berlioz shares currently sell for $35.00 per share.The firm pays dividends annually and expects dividends to grow at a constant rate of 5% indefinitely.The most recent dividend per share,paid yesterday,is $2.00.Finally,the firm has a marginal tax rate of 34%.
-The cost of ordinary equity using the CAPM is

Question

Quizplus · Accepted Answer

Applying the CAPM formula:
Cost of Equity = Risk-Free Rate + (Beta x (Market Return - Risk-Free Rate))
= 4% + (0.90 x (12% - 4%))
= 4% + (0.90 x 8%)
= 4% + 7.20%
= 11.20%

Therefore, the cost of ordinary equity using the CAPM is 11.20%. Hence, the answer is option B.

Use the Following Information to Answer the Following Question(s)