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2 June, 17:36

Tidewater Fishing has a current beta of 1.16. The market risk premium is 6.8 percent and the risk-free rate of return is 2.9 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.18?

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  1. 2 June, 18:04
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    increase in cost of equity Ke = 0.14%

    Explanation:

    given data

    current beta = 1.16

    market risk premium = 6.8 percent

    risk-free rate of return = 2.9 percent

    beta rises = 1.18

    solution

    we get cost of equity when beta β is 1.16

    cost of equity Ke = Rf + β (Rm - Rf) ... 1

    cost of equity Ke = 2.9 % + 1.16 (6.8%)

    cost of equity Ke = 10.788 %

    and

    cost of equity when beta is 1.18

    cost of equity Ke = 2.9 % + 1.18 (6.8 %)

    cost of equity Ke = 10.924 %

    so that

    increase in cost of equity Ke = 10.924 % - 10.788 %

    so increase in cost of equity Ke = 0.136

    increase in cost of equity Ke = 0.14%
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