Question

The Dybvig Corporation’s common stock has a beta of 1.7. If the risk-free rate is 5.7 percent and the expected return on the market is 11 percent, what is Dybvig’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

14.71%

Step-by-step explanation:

The computation of the cost of equity could be find out by using the Capital Asset Pricing Model formula which is shown below:

Cost of equity = Risk free rate of return + Beta × (Market rate of return - risk free rate of return)

where,

Risk free rate of return is 5.7%

Beta is 1.7

And, the market rate of return is 11%

Now placing these values to the above formula

So, the cost of equity capital is

= 5.7% + 1.7 × (11% - 5.7%)

= 5.7% + 1.7 × 5.3%

= 5.7% + 9.01%

= 14.71%