Finance for Managers MGT-325-OLO1 Natha Homework: Assignment 5 Score: 0 of 10 pt

Question

Finance for Managers MGT-325-OLO1 Natha Homework: Assignment 5 Score: 0 of 10 pts | 20110 (0 complete) | P9-9 (similar to) Cost of common stock equity CAPM J&M Corporation common stock has a beta, b, of 1.4 The risk free rate is 6%, and the market return is 9%. a. Determine the risk premium on J&M common stock b. Determine the required return that J&M common stock should provide. c. Determine J&M's cost of common stock equity using the CAPM. a. The risk premium on J&M common stock is % (Round to one decimal place)

Explanation / Answer

Answer a.

Risk Premium = Market Return - Risk-free Rate
Risk Premium = 9.0% - 6.0%
Risk Premium = 3.0%

Answer b.

Market Risk Premium = Beta * Risk Premium
Market Risk Premium = 1.4 * 3.0%
Market Risk Premium = 4.2%

Required Return = Risk-free Rate + Market Risk Premium
Required Return = 6.0% + 4.2%
Required Return = 10.2%

Answer c.

Cost of Common Stock = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Cost of Common Stock = 6.0% + 1.4 * (9.0% - 6.0%)
Cost of Common Stock = 10.2%

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