Alpha's beta is 1.06,the present T-bond rate is 6%,and the return on the S & P 500 is 15.25%.What is Alpha's cost of ordinary equity using the CAPM approach?

Question

Quizplus · Accepted Answer

Cost of equity using CAPM approach can be calculated using the formula:

Cost of equity = Risk-free rate + (Beta x Market risk premium)

Risk-free rate = 6%
Beta = 1.06
Market risk premium = 15.25% - 6% = 9.25%

Cost of equity = 6% + (1.06 x 9.25%) = 15.81%

Therefore, the best choice is B, which is 15.81%.

Alpha's Beta Is 1