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5 January, 09:13

The Dybvig Corporation's common stock has a beta of 1.5. If the risk-free rate is 4.6 percent and the expected return on the market is 12 percent, what is Dybvig's cost of equity capital?

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  1. 5 January, 09:29
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    Dybvig's cost of equity capital is 15.7%

    Explanation:

    Capital asset pricing model measure the expected return on an asset or investment. it is used to make decision for addition of specific investment in a well diversified portfolio.

    Formula for CAPM

    Cost of Capital = Risk free rate + beta (market return - risk free rate)

    Cost of Capital = Rf + β (Rm - Rf)

    Cost of Capital = 4.6% + 1.5 (12% - 4.6%)

    Cost of Capital = 15.7%
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