Question

1. The Troller Corporation’s common stock has a beta of 1.15. If the risk-free rate is 3.5 percent and the expected return on the market is 11 percent, what is the company’s cost of equity capital?

Answer 1

Cost of equity capital is 0.12125 or 12.125%

Step-by-step explanation:

The cost of equity capital or the required rate of return is the minimum rate of return expected by the investors to invest in the stock of the company. The cost of equity capital can be calculated using the CAPM equation. The formula for CAPM is,

r = rRF + Beta * (rM - rRF)

Where,

• r is the cost of equity capital or required rate of return
• rRF is the risk free rate
• rM is the return on Market

r = 0.035 + 1.15 * (0.11 - 0.035)

r = 0.12125 or 12.125%