Cost of common stock equity CAPM J&M Corporation common stock has a beta, b-of08
ID: 2808523 • Letter: C
Question
Cost of common stock equity CAPM J&M Corporation common stock has a beta, b-of08. The riskfree rate is 6%, ad the market return is 11%, a. Determine the risk premium on J&M common stock b. Determine the required retur that J&M common stock should provide c. Determine J&M's cost of common stock equity using the CAPM. a. The risk premium on J&Mcommon stock is % (Round to one decimal place) b. The required return that J&M common stock should provide is % (Round to one decimal place) c J&Ms cost of om mon stock equity using the CAPM is %, (Round to one decimal pla o)Explanation / Answer
As per CAPM, required rate of return = risk free rate + (market return - risk free rate)*beta
a. risk premium = (market return - risk free rate)*beta = (11-6)*0.8 = 5*0.8 = 4%
b. required return = 6 + 4 = 10%
c. cost of common equity = required rate = 10%