A firm has a beta of 1.2. The market return equals 14% and the risk- free rate of return equals 6 %. The estimated cost of ordinary equity is
A) 6%
B) 15.6%
C) 14%
D) 7.2%

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM):
Cost of Equity = Risk-free rate + Beta * (Market return - Risk-free rate)
Cost of Equity = 6% + 1.2 * (14% - 6%)
Cost of Equity = 6% + 1.2 * 8%
Cost of Equity = 6% + 9.6%
Cost of Equity = 15.6%

Therefore, the estimated cost of ordinary equity is 15.6%, which is option B.

A Firm Has a Beta of 1