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13 December, 17:34

The common stock of Modern Interiors has a beta of 1.61 and a standard deviation of 27.4 percent. The market rate of return is 13.2 percent and the risk-free rate is 4.8 percent. What is the cost of equity for this firm?

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  1. 13 December, 17:52
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    18.324%

    Explanation:

    Given:

    Beta = 1.61

    Standard deviation = 27.4 percent

    Market rate of return = 13.2 percent

    Risk-free rate = 4.8 percent

    Now,

    cost of equity for the firm is calculated as:

    Cost of equity

    = Risk-free rate + Beta * (Market rate of return - Risk-free rate)

    on substituting the respective values, we get

    Cost of equity = 4.8% + 1.61 * (13.2% - 4.8%)

    or

    The cost of equity of the firm = 18.324%
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