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20 June, 20:32

1. The Roland Corporation's common stock has a beta of 1.45. If the risk-free rate is 2.25 percent and the market risk premium is 7.75 percent, what is the company's cost of equity capital?

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  1. 20 June, 20:53
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    10.22%

    Explanation:

    Data provided

    Beta = 1.45

    Risk-free rate = 2.25

    market risk premium = 7.75%

    The computation of company's cost of equity capital is shown below:-

    Risk free rate + Beta * (Expected return on market - Risk free rate)

    = 0.0225 + 1.45 * (0.0775 - 0.0225)

    = 0.0225 + 1.45 * 0.055

    = 0.0225 + 0.07975

    = 0.10225

    or 10.22%
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