Question

Musical Charts just paid an annual dividend of $1.84 per share. This dividend is expected to increase by 2.1 percent annually. Currently, the firm has a beta of 1.12 and a stock price of $31 a share. The risk-free rate is 4.3 percent and the market rate of return is 13.2 percent. What is the cost of equity capital for this firm?

Answer 1

Ke = Rf + β(Rm - Rf)

Ke = 4.3 + 1.12(13.2 - 4.3)

Ke = 4.3 + 1.12(8.9)

Ke = 4.3 + 9.968

Ke = 14.268%

Step-by-step explanation:

In this question, there is need to calculate cost of equity based on capital asset pricing model. Cost of equity is a function of risk-free rate plus beta multiplied by the difference between market return and risk free rate.