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Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 0.70. Based on the CAPM approach, what is the cost of equity from retained earnings?

Respuesta :

Answer:

The correct answer is 7.775%.

Explanation:

The risk-free rate is given at 4.10%.

The market risk premium is 5.25%.

Beta is given at 0.70.

Based on the CAPM approach the cost of equity from retained earnings  will be

=Risk free rate+beta(market risk premium)

=0.041+0.7*0.0525

=0.041+0.03675

=0.07775

So, the cost of equity from retained earnings is 7.775%.