Heino Inc. hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: rRF = 5.0%; MRP = 5.0%; and b = 1.1. Based on the CAPM approach, what is the cost of equity from retained earnings?
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To calculate the cost of equity from retained earnings using the Capital Asset Pricing Model (CAPM) approach, you need to use the following formula:
Cost of Equity (Ke) = rRF + (MRP * b)
Here's how to calculate it using the given data:
1. Identify the given data:
- Risk-free rate (rRF) = 5.0%
- Market Risk Premium (MRP) = 5.0%
- Beta (b) = 1.1
2. Plug in the values into the formula:
Cost of Equity (Ke) = 5.0% + (5.0% * 1.1)
3. Simplify the equation:
Cost of Equity (Ke) = 5.0% + 5.5%
Cost of Equity (Ke) = 10.5%
Therefore, based on the CAPM approach, the cost of equity from retained earnings for Heino Inc. is 10.5%.