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9 July, 09:50

The Nixon Corporation's common stock has a beta of 1.7. If the risk-free rate is 4.8 percent and the expected return on the market is 10 percent, what is the company's cost of equity capital?

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  1. 9 July, 13:50
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    13.64%

    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)

    = 4.8% + 1.7 * (10% - 4.8%)

    = 4.8% + 1.7 * 5.2%

    = 4.8% + 8.84%

    = 13.64%

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