rRF = 5.0%; MRP = 5.0%; and b = 1.1. Based on the CAPM approach, what is the cost of equity from retained earnings?
To calculate the cost of equity from retained earnings using the Capital Asset Pricing Model (CAPM) approach, you need the risk-free rate of return (rRF), the market risk premium (MRP), and the beta coefficient (b).
In this case, the given values are:
- Risk-free rate of return (rRF) = 5.0%
- Market risk premium (MRP) = 5.0%
- Beta coefficient (b) = 1.1
The formula to calculate the cost of equity (Ke) using CAPM is as follows:
Ke = rRF + (MRP * b)
Now let's substitute the given values into the formula:
Ke = 0.05 + (0.05 * 1.1)
To get the cost of equity from retained earnings, we can simply calculate this expression:
Ke = 0.05 + (0.055)
Ke = 0.105 or 10.5%
Therefore, the cost of equity from retained earnings, based on the CAPM approach, is 10.5%.