The Graber Corporation's common stock has a beta of 1.8. If the risk-free rate is 5.8 percent and the expected return on the market is 12 percent, what is the company's cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

Question

Business

Blaine Harrison

20 February, 20:09

The Graber Corporation's common stock has a beta of 1.8. If the risk-free rate is 5.8 percent and the expected return on the market is 12 percent, what is the company's cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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Answers (1)

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Braylon Graves · Answer 1

16.96%

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

= 5.8% + 1.8 * (12% - 5.8%)

= 5.8% + 1.8 * 6.2%

= 5.8% + 11.16%

= 16.96%

The (Market rate of return - Risk-free rate of return) is also called market risk premium