Question

You know that the return of Cullumber Cyclicals common shares is 1.0 times as sensitive to macroeconomic information as the return of the market. If the risk-free rate of return is 2.40 percent and market risk premium is 5.71 percent, what is Cullumber Cyclicals’ cost of common equity capital?

Answer 1

8.11%

Step-by-step explanation:

Cullumber Cyclicals beta = 1 since its sensitive to macroeconomic information (the whole market) is 1.

cost of equity (Re) = risk free + (beta x market premium)

Re = 2.4% + (1 x 5.71%) = 2.4% + 5.71% = 8.11%

Since the beta is 1, this specific stock should perform exactly like the market.