Question

The Dybvig Corporation’s common stock has a beta of 1.2. If the risk-free rate is 5.2 percent and the expected return on the market is 10 percent, what is Dybvig’s cost of equity capital? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Cost of equity capital

%

Answer 1

Based on CAPM,

Cost of Equity = Risk free rate + Beta * (Expected market return - Risk free rate)

Cost of Equity = 5.2% + 1.2 * (10% - 5.2%)

Cost of Equity = 10.96%