Question

What is the cost of equity for the TMB Corporation based on the following information? Risk premium = 5% Risk free rate = 4% TMB beta: 1.50

Answer 1

11.50%

Step-by-step explanation:

The computation of the cost of equity is shown below:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 4% + 1.5 × 5%

= 4% + 7.5%

= 11.50%

The Market rate of return - Risk-free rate of return) is also known as the market risk premium and the same is applied.