You know that the return of Carla Vista Cyclicals common shares is 1.7 times as sensitive...
You know that the return of Carla Vista Cyclicals common shares is 1.7 times as sensitive to macroeconomic information as the return of the market. If the risk-free rate of return is 3.45 percent and market risk premium is 5.71 percent, what is Carla Vista Cyclicals’ cost of common equity capital? (Round intermediate calculation to 5 decimal places, e.g. 1.25140 and final answer to 2 decimal places, e.g. 15.25%.) Cost of common equity capital
Homework Answers
Based on CAPM,
Cost of Equity = Risk free rate + Beta * market risk premium
Beta = 1.7
Cost of Equity = 3.45% + 1.7 * 5.71%
Cost of Equity = 13.16%
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