The Jersey Co‘s common stock has beta of 1.25. The risk free rate is 4% and the expected return on the market is 12%. What is the firm’s cost of equity?
To calculate the cost of equity for the Jersey Co, we can use the capital asset pricing model (CAPM) formula. The CAPM formula is as follows:
Cost of Equity = Risk-free Rate + Beta × (Expected Market Return - Risk-free Rate)
Let's plug in the given values into the formula:
Risk-free Rate = 4%
Beta = 1.25
Expected Market Return = 12%
Now we can calculate the cost of equity:
Cost of Equity = 4% + 1.25 × (12% - 4%)
Cost of Equity = 4% + 1.25 × 8%
Cost of Equity = 4% + 10%
Cost of Equity = 14%
Therefore, the firm's cost of equity is 14%.