TJ Co. stock has a beta of 1.45, the current risk-free rate is 5.75, and the expected return on the market is 14 percent. What is TJ Co's cost of equity?

Question

Business

Chasity Andersen

27 January, 11:15

TJ Co. stock has a beta of 1.45, the current risk-free rate is 5.75, and the expected return on the market is 14 percent. What is TJ Co's cost of equity?

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Answers (1)

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Wiley · Answer 1

17.71%

Explanation:

For this problem, we will be making use of the Capital Asset Pricing Model (CAPM) equation, as seen below:

ERi = Rf + β (ERm - Rf)

ERi = expected return of investment Rf = risk free investment = 5.75% β = beta of the investment = 1.45 (ERm - Rf) = market risk premium = 14% - 5.75% = 8.25%

ERi = 5.75% + (1.45 x 8.25%) = 5.75% + 11.96% = 17.71%