Indicate the cost of equity capital, based on capital asset pricing model, with the following information : Beta coefficient – 1.40 Risk-free rate of interest – 9% Expected Rate of Return on equity in the market – 16%
18.8%
Under the capital asset pricing model, the cost of equity is the risk-free rate plus beta times the market risk premium: \( k_e = R_f + \beta (R_m - R_f) \).
Here \( R_f = 9\% \), \( R_m = 16\% \) and \( \beta = 1.40 \), so the market risk premium is \( 16\% - 9\% = 7\% \).
Then \( k_e = 9\% + 1.40 \times 7\% = 9\% + 9.8\% = 18.8\% \).
The value 9.8% is only the risk premium for this share, 16% is the market return that ignores the higher beta, and 18% does not follow from the formula.
Hence, 18.8%.
Similar Questions
A company has issued 10 percent perpetual debt of ₹ 1 lac at 5 percent premium. If tax rate is 30 percent, then the cost of debt will be :
Assertion (A) : Weighted average cost of capital should be used as a hurdle rate for accepting or rejecting a capital budgeting proposal.
Reason (R) : It is because by financing in the proportions specified and accepting the project, yielding more than the weighted average required return, the firm is able to increase the market price of its stock.
Codes :
Match the items of the following two lists and suggest the correct code :
List – I List – II a. Realised yield method i. Cost of equity share capital b. Taxation ii. Cost of equity capital c. Cost of total capital employed iii. Cost of debt capital d. Dividend growth is a consideration iv. Weighted cost of capital Codes :
a b c d
From investor’s point of view, the cost of capital is :
Important Questions from Cost of Capital
A company has 10% perpetual debt of Rs. 1,00,000. The tax rate is 35%. Which one of the following is the after-tax cost of capital assuming that the debt is issued at 10% premium?
Company's current price of share is Rs. 60 and dividend per share is Rs. 4 . If its capitalisation rate is 12 percents. What is dividend growth rate?
X Ltd. forfeited 40 shares of Rs. 10 each and on which Rs. 4 per share were paid. If the forfeited shares reissued as Rs. 8 per share paid up, what is the minimum price the company must charge?
Which of the sources of finance has an implicit cost of capital?
Cost of Equity Share Capital is more than cost of Debt because :
