A stock has a Beta of 1.39. The current risk free rate in the economy is 1.68%, while the market portfolio risk premium is 6%. Find the cost of equity for this stock.

Answer 1

The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula:

\[ \text{Cost of Equity} = \text{Risk-Free Rate} + \beta \times \text{Market Risk Premium} \]

Where:

• \(\text{Risk-Free Rate}\) = 1.68%
• \(\beta\) = 1.39
• \(\text{Market Risk Premium}\) = 6%

Now, substituting the values into the formula:

\[ \text{Cost of Equity} = 1.68% + 1.39 \times 6% \]

Calculating the market risk premium component:

\[ 1.39 \times 6% = 8.34% \]

Now add this to the risk-free rate:

\[ \text{Cost of Equity} = 1.68% + 8.34% = 10.02% \]

Therefore, the cost of equity for the stock is 10.02%.