Question

Diddy Corp. stock has a beta of 1.4, the current risk-free rate is 5 percent, and the expected return on the market is 14.00 percent. What is Diddy’s cost of equity? (Round your answer to 2 decimal places.)

Answer 1

Answer:

0.19 0r 19%

Explanation:

The cost of equity can be said to be the amount or returns paid by an organization to its equity investors, and this includes shareholders. This is usually done to ensure they are compensated for the risk taken by funding the business with the capital needed.

From a CAPM point of view

Cost of equity = risk free rate + (Return on market - risk free rate) * Beta

Hence from our question:

Cost of Equity = 0.05 + (0.14 - 0.04) * 1.4

= 0.05 + 1.4(0.1)

= 0.05 + 0.14 = 0.19

Cost of equity = 19%