This Question: 1 pt 3 of 10 (0 complete) Thi J&M; Corporation common stock has a

Question

This Question: 1 pt 3 of 10 (0 complete) Thi J&M; Corporation common stock has a beta, b. of 1.5. The nsk-free rate is 7%, and the market return is 13%. a. Determine the risk premium on J&M; common stock b. Determine the required return that J&M; common stock should provide c. Determine J&M;'s cost of common stock equity using the CAPM a. The risk premium on J&M; common stock is % (Round to one decimal place) b. The required return that J&M; common stock should provide is% (Round to one decimal place c. J&Ms; cost of common stock equity using the CAPM is% (Round to one decimal place)

Explanation / Answer

beta = 1.5

Irf = 7%

RM = 13%

CAPM : RS = IRF + (RM - IRF)* Beta

: RS = 7% + (13% - 7%)* 1.5

= 7% + 9% = 16%

Cost of common equity using CAPM = 16%

a. The risk premium on J&M common stock = 16% - 7% = 9%

b. 16.0% (Calculated above)

c. 16.0% (Calculated above)

Cost of capitla and required return on stock is same.

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