Question

The common stock of Kansas City Power and Light has a beta of 0.80. The Treasury bill rate is 4 percent and the market risk premium is 8 percent. What is their cost of equity capital?

Answer 1

Cost of equity capital is 10.40 %.

Step-by-step explanation:

CAPM stands for Capital Assets Pricing Model. It is used by the investor to measure the cost of equity capital. It is commonly used for measuring expected rate return of financial securities/stocks for given level of risk associated with it.

Mathematically, Cost of shareholder equity can be calculated as follow ;

Cost of Shareholder equity = Risk free rate + (Beta of stock x Market Risk Premium) ------- (a)

Risk free rate or T- bills rate = 4 %

Beta of Stock = 0.80

Market risk Premium = 8 %

By putting the values in equation (a)

Cost of shareholder equity or equity capital = 4 % + 0.80 x 8 %

Cost of equity capital = 10.4 % .