Question

using the following variables, calculate an organizations cost of common equity.

• $r_f$: 1.5%
• $\beta_s$: 1.4
• $(r_m - r_f)$: 8%

options:

• 10.2%
• 12.7%
• 11.6%
• 9.7%

Explanation:

Step1: Recall CAPM formula

The Capital Asset Pricing Model (CAPM) formula for the cost of common equity \( R_s \) is \( R_s = R_f + \beta_s \times (R_m - R_f) \).

Step2: Substitute given values

We know \( R_f = 1.5\% \), \( \beta_s = 1.4 \), and \( (R_m - R_f) = 8\% \). Substitute these into the formula: \( R_s = 1.5\% + 1.4 \times 8\% \).

Step3: Calculate the product

First, calculate \( 1.4 \times 8\% = 11.2\% \).

Step4: Add the risk - free rate

Then, add \( R_f \): \( 1.5\% + 11.2\% = 12.7\% \).

Answer:

12.7%