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Ebey’s Enterprises has a beta of 2. The stock is currently selling for $12 a share....

Ebey’s Enterprises has a beta of 2. The stock is currently selling for $12 a share. The overall stock market has a10 percent rate of return and a risk premium of 8 percent. What is the firm’s cost of equity?

Group of answer choices

2%

20% 6%

22%

18%

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Answer #1

Risk-free rate = Market return - Risk premium = 10% - 8% = 2%

Cost of equity = Risk-free rate + Beta(Risk premium)

Cost of equity = 0.02 + 2(0.08)

Cost of equity = 0.18 or 18%

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