The U.S. risk-free rate is currently 3%. The expected U.S. market return is 10%. Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of dollar-denominated equity?
A) 8.4%
B) 11.4%
C) 10%
D) None of the above

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM) which is:
Cost of Equity = Risk-Free Rate + Beta*(Expected Market Return - Risk-Free Rate)
Cost of Equity = 3% + 1.2*(10% - 3%)
Cost of Equity = 3% + 1.2*7%
Cost of Equity = 11.4%

The US Risk-Free Rate Is Currently 3