As a senior corporate financial analyst you were approached by the Matthew Corp.

Question

As a senior corporate financial analyst you were approached by the Matthew Corp.s CFO and asked to determine the cost of common equity. You read about the Nobel prize-winning mean variance capital asset pricing model and decided to give it a try. You found the beta for Marshall is 1.80, the rate of return on long term US government bonds to be 3%, the return on short term government bonds is 2.5%, and the market risk premium over the past 70 years has averaged 5%. Using this data, what is Matthews cost of equity? (round at 2 decimal places)

Explanation / Answer

cost of equity = risk free rate + beta * market risk premium

riskfree rate is nothing but return on short term government bonds

so

cost of equity = 2.5% + 1.8 * 5% = 11.50%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.