Question

H2W Technologies is considering raising capital to expand its offerings of two-phase and four-phase linear stepper motors. The beta value for its stock is high at 1.3. Use the capital asset pricing model and a 4.4% premium above the risk-free return to determine the cost of equity capital. The risk-free return is 3.5% per year.
The cost of equity capital is ________

Answer 1

Answer:

9.22%

Explanation:

For this question, we use the Capital asset pricing model (CAPM) formula which is shown below:

Cost of Equity capital = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

whee,

(Market rate of return - Risk-free rate of return) is also known as market risk premium i.e 4.4%

So, the cost of equity capital is

= 3.5% + 1.3 × 4.4%

= 3.5% + 5.72%

= 9.22%