Musical Charts just paid an annual dividend of $1.84 per share. This dividend is expected to increase by 2.1 percent annually. Currently, the firm has a beta of 1.12 and a stock price of $31 a share. The risk-free rate is 4.3 percent and the market rate of return is 13.2 percent. What is the cost of equity capital for this firm?

Question

Business

Hadley Vaughan

16 June, 17:39

Musical Charts just paid an annual dividend of $1.84 per share. This dividend is expected to increase by 2.1 percent annually. Currently, the firm has a beta of 1.12 and a stock price of $31 a share. The risk-free rate is 4.3 percent and the market rate of return is 13.2 percent. What is the cost of equity capital for this firm?

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Answers (1)

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Holden · Answer 1

Ke = Rf + β (Rm - Rf)

Ke = 4.3 + 1.12 (13.2 - 4.3)

Ke = 4.3 + 1.12 (8.9)

Ke = 4.3 + 9.968

Ke = 14.268%

Explanation:

In this question, there is need to calculate cost of equity based on capital asset pricing model. Cost of equity is a function of risk-free rate plus beta multiplied by the difference between market return and risk free rate.