Diddy Corp. stock has a beta of 1.0, the current risk-free rate is 5 percent, and the expected return on the market is 15.5 percent. What is Diddy's cost of equity?
A) 15.50 percent
B) 14.20 percent
C) 18.50 percent
D) 16.30 percent

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: Cost of Equity = 5% + 1.0 * (15.5% - 5%) = 5% + 10.5% = 15.5%.