Boohner book stores has a beta of 0.8. The yield on a 3-month T-bill is 4%, and
ID: 2651918 • Letter: B
Question
Boohner book stores has a beta of 0.8. The yield on a 3-month T-bill is 4%, and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM model?Boohner book stores has a beta of 0.8. The yield on a 3-month T-bill is 4%, and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM model?
Explanation / Answer
Answer:
As per CAPM M0del:
Estimated cost of common equity = Risk free rate + Beta * Market risk premium
Here Risk free rate = Average rate = 4%+6% /2 = 5%
Hence ,
Estimated cost of common equity =5% + 0.8 * 5.5%
= 9.4%