Zonk Corp. The following data pertains to Zonk Corp.,a manufacturer of ball bearings (dollar amounts in millions):
Assuming that riskless rate is 4.2% and the market premium is 6.2% calculate Zonk's cost of equity capital:
A) 10.4%
B) 7.69%
C) 11.89%
D) 2.0%

Question

Zonk Corp. The following data pertains to Zonk Corp.,a manufacturer of ball bearings (dollar amounts in millions):
 Assuming that riskless rate is 4.2% and the market premium is 6.2% calculate Zonk's cost of equity capital:
A) 10.4% 
B) 7.69% 
C) 11.89% 
D) 2.0%

Quizplus · Accepted Answer

Zonk's cost of equity capital can be calculated using the CAPM formula:
Cost of equity = Risk-free rate + (Market premium * Beta)
First, we need to calculate Zonk's Beta using the given information. We can use the formula:
Beta = (Stock return - Risk-free rate) / Market return - Risk-free rate)
Beta = (14% - 4.2%) / 12.5% = 0.88
Now we can use the CAPM formula:
Cost of equity = 4.2% + (6.2% * 0.88) = 11.89%
Therefore, the best choice is C, 11.89%.

Zonk Corp the Following Data Pertains to Zonk Corp