The Up and Coming Corporation\'s common stock has a beta of 1.3. If the risk-fre

Question

The Up and Coming Corporation's common stock has a beta of 1.3. If the risk-free rate is 4.5 percent and the expected return on the market is 10 percent, what is the company's cost of equity capital? (Do not round your intermediate calculations.)

11.65%

12.12%

12.23%

17.5%

11.07%

The Up and Coming Corporation's common stock has a beta of 1.3. If the risk-free rate is 4.5 percent and the expected return on the market is 10 percent, what is the company's cost of equity capital? (Do not round your intermediate calculations.)

Explanation / Answer

Capital asset pricing is used to calculate required rate of return

Required rate of return = Risk free rate of return + Beta (Market return - Risk free return)

Where,

Risk free rate of return= 0.045

Beta= 1.3

Market return= 0.1

Let’s put all the values in the formula

Required rate of return = 0.045+1.3(0.1-0.045)

= 0.045 + 1.3(0.055)

= 0.045 + 0.0715

= 0.1165

So the required rate of return is 11.65%

Correct answer is A.

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