The Allegheny Valley Power Company common stock has a beta of 0.80. Assume the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM).

a. 14.1%b. 7.6%c. 6.5%d. 13.0%

correct option is a. 14.1%

Explanation:

given data

beta = 0.80

current risk-free rate = 6.5%

expected return = 16%

solution

we get here cost of equity capital that is express as

cost of equity capital = current risk-free rate + beta (expected return - current risk-free rate) ... 1

put here value ans we will get cost of equity capital

cost of equity capital = 6.5% + 0.8 (16% - 6.5%)

solve it we get

cost of equity capital = 14.1%

so correct option is a. 14.1%