Suppose the market risk premium is 6.5% and the risk-free interest rate is 5%. Calculate the cost of capital of investing in a project with a beta of 1.2.
12.8
To calculate the cost of capital, you need to use the Capital Asset Pricing Model (CAPM) formula:
Cost of Capital = Risk-Free Rate + Beta × Market Risk Premium
Let's plug in the given values in the formula:
Risk-Free Rate = 5%
Beta = 1.2
Market Risk Premium = 6.5%
Cost of Capital = 5% + (1.2 × 6.5%)
Cost of Capital = 5% + 7.8%
Cost of Capital = 12.8%
Therefore, the cost of capital for investing in the project with a beta of 1.2 is 12.8%.