Assume that The Jackson Company has a beta of 0.7 and the risk-free rate of return...
Assume that The Jackson Company has a beta of 0.7 and the risk-free rate of return is 5.0 percent. If the equity-risk premium is seven percent, calculate the cost of equity for The Jackson Company using the capital asset pricing model. Round to the nearest decimal point.
Homework Answers
SOLUTION
Calculation of cost of equity.
Cost of equity = Risk free rate + Beta ( Market rate of return - Risk free rate)
= 5+ 0.7 ( 7 )
= 5 + 4.9
= 9.9
= 10 % ( round off )
- ( Market rate of return - Risk free rate) = Risk premium
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