Zolar Corp. The following data pertains to Zolar 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 Zolar's cost of equity capital:
A) 10.4%
B) 7.69%
C) 11.89%
D) 2.0%

Question

Zolar Corp. The following data pertains to Zolar 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 Zolar's cost of equity capital:
A) 10.4% 
B) 7.69% 
C) 11.89% 
D) 2.0%

Quizplus · Accepted Answer

To calculate the cost of equity capital using the capital asset pricing model (CAPM) the formula is:
Cost of Equity Capital (Ke) = Risk-free rate + beta * (Market premium)

Given data: 
Risk-free rate = 4.2%
Market premium = 6.2%
Beta of Zolar Corp. is not given in the question.

To calculate beta of Zolar Corp., we need information about the historical returns of Zolar's stock and the market returns.

As the beta of the company is not given in the question, we cannot calculate the cost of equity capital accurately, hence we can only choose the option that is closest to the range of the cost of equity capital for the ball bearing manufacturing industry.

Based on this consideration, option C (11.89%) seems to be the closest to the plausible range of cost of equity capital for ball bearing manufacturing industry. Thus, option C is the best choice.