Question

A firm has a beta of 1.2. the risk premium (rp) equals 9.6% percent and the risk-free rate of return equals 6 percent. the estimated cost of common stock equity is __

a. 15.6 percent
b. 14 percent
c. 6 percent

Answer 1

The estimated cost of common stock equity is 17.52%.

Step-by-step explanation:

The estimated cost of common stock equity can be calculated using the formula:

Cost of Common stock equity = Risk-free rate + (Beta x Risk Premium)

Substituting the given values, the estimated cost of common stock equity = 6% + (1.2 x 9.6%) = 6% + 11.52% = 17.52%

Therefore, the estimated cost of common stock equity is 17.52%.