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Suppose that in the coming year,you expect Exxon-Mobil stock to have a volatility of 42% and a beta of 0.9,and Merck's stock to have a volatility of 24% and a beta of 1.1.The risk-free interest rate is 4% and the market's expected return is 12%.
-The cost of capital for a project with the same beta as Merck's stock is closest to:
A)11.2%.
B)12.8%.
C)12.4%.
D)11.6%.

Question

Quizplus · Accepted Answer

The cost of capital can be calculated using the Capital Asset Pricing Model (CAPM): Cost of Capital = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). For Merck's stock, it is 4% + 1.1 * (12% - 4%) = 12.8%.

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