Question

Smathers Corp. stock has a beta of .89. The market risk premium is 7.20 percent and the risk-free rate is 2.93 percent annually. What is the company's cost of equity

Answer 1

Answer: 9.31%

Explanation:

Given: Smathers Corp. stock has a beta of 0.89.

⇒ Beta = 0.89

Risk-free rate = 2.93 percent

Market risk premium = 7.20 percent

Formula: Cost of Equity = [ Risk free rate + (Beta) × ( Market risk premium) ]

Substitute all values, we get

Cost of Equity =  [ 2.9 + (0.89) × ( 7.20) ]%

= [2.9+6.41]%

= 9.31%

Hence, the company's cost of equity is 9.31%.