Calculating Cost of Equity. Bohannon Corporation's common stock has a beta of 1.10. If the risk-free rate is 4.5% and the expected return on the market is 12%, what is the company's cost of equity capital?

Answer 1

R = Rf + (Rm - Rf)*B
= 4.5% + (12% - 4.5%)*1.10
= 4.5% + 7.5%*1.1
= 4.5% + 8.25%
= 12.75%

Cost of equity = 12.75%