Cost of common stock equity--cAPM J&M; Corporation common stock has a beta, b, o
ID: 2787945 • Letter: C
Question
Cost of common stock equity--cAPM J&M; Corporation common stock has a beta, b, of 0.5. The risk-free rate is 3%, and the market return is 11%. a. Determine the risk premium on J&M; common stock. c. Determine J&M;'s cost of common stock equity using the CAPM. a. The risk premium on J&M; common stock is %. (Round to one decimal place) b. The required return that J&M; common stock c. J&M;'s cost of common stock equity using the CAPM is %. should provide is %. (Round to one decimal place) (Round to one decimal place)Explanation / Answer
a.
Risk premium = market return - risk free rate = 11%-3% = 8%
b.
Market risk premium = 0.5*8% = 4%
Required return = risk free rate + market risk premium = 3%+4% = 7%
c.
According to CAPM,
Cost of equity = risk free rate + beta*(market return - risk free rate)
cost of equity = 3% + 0.5*(8%-3%) = 7%