Educational Gaming is considering developing and distributing a new arithmetic a

Question

Educational Gaming is considering developing and distributing a new arithmetic app for children. The project is similar in risk to the firm's current operations. The firm maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm's rapid growth. Educational Gaming should determine its cost of equity by __________________.

using the dividend growth model

using the capital asset pricing model

adding the market risk premium to the after-tax cost of debt

averaging the costs based on the dividend growth model and the capital asset pricing model

multiplying the market risk premium by (1 - .040)

using the dividend growth model

using the capital asset pricing model

adding the market risk premium to the after-tax cost of debt

averaging the costs based on the dividend growth model and the capital asset pricing model

multiplying the market risk premium by (1 - .040)

Explanation / Answer

Educational gaming can calculated cost of equity value uisng CAPM model. To calculate Cost of equity using CAPM model first of all company has to calculated levered beta with debt equity ratio of 40%. after calculation of levered beta company can calculated cost of equity using CAPM model.

Hence, Option (B) is correct answer.

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