10. A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is _____ percent. (Please calculate the arithmetic solution and show your work)
To calculate the estimated cost of common stock equity using the Capital Asset Pricing Model (CAPM), you will need the following formula:
Cost of common stock equity = Risk-free rate + Beta * (Market return - Risk-free rate)
Given information:
Beta (β) = 1.2
Market return = 14%
Risk-free rate = 6%
Now, let's plug in the values into the formula and calculate the estimated cost of common stock equity:
Cost of common stock equity = 6% + 1.2 * (14% - 6%)
= 6% + 1.2 * 8%
= 6% + 9.6%
= 15.6%
Therefore, the estimated cost of common stock equity is 15.6%.
The estimated cost of common stock equity can be calculated using the Capital Asset Pricing Model (CAPM) formula:
Cost of Common Stock Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
Given:
Beta = 1.2
Market Return = 14%
Risk-Free Rate = 6%
Using the formula, we can substitute the given values:
Cost of Common Stock Equity = 6% + 1.2 * (14% - 6%)
Simplifying the equation:
Cost of Common Stock Equity = 6 + 1.2 * 8
Cost of Common Stock Equity = 6 + 9.6
Cost of Common Stock Equity = 15.6%
Therefore, the estimated cost of common stock equity is 15.6%.