Question

Southern Home Cookin' just paid its annual dividend of $0.42 a share. The stock has a market price of $20 and a beta of 0.8. The return on the U.S. Treasury bill is 3 percent and the market return is 14 percent. What is the cost of equity? A. 8.8 percent B. 11.2 percent C. 11.8 percent D. 14.2 percent E. None of the above

Answer 1

C. 11.8 percent

Step-by-step explanation:

The computation of the cost of equity is shown below:

= Risk free rate of return + Beta × market risk premium

= 3% + 0.8 × (14% - 3%)

= 3% + 0.8 × 11%

= 3% + 8.8%

= 11.8%

Hence, the cost of equity is 11.8%

Therefore the correct option is c.

We simply applied the above formula so that the correct value could come

And, the same is to be considered