Question

Shares in prince and nice have a beta of 0.9. The expected returns to the market are 10% and the risk free rate of return is 4%. What is the cost of equity capital for prince and nice?

Answer 1

Answer:

9.4%

Explanation:

using the CAPM formula, the cost of equity (Re) is:

Re = Rf + B(Rm - Rf)

• Rf = risk free rate = 4%
• Rm = market risk = 10%
• B = beta = 0.9

Re = 4% x [0.9 x (10% - 4%)] = 4% x (0.9 x 6%) = 4% x 5.4% = 9.4%

The cost of equity (Re) refers to the required rate of return that investors expect to receive from a certain investment, e.g. stocks or any particular project