Akeya Equipment has 6 million shares of common stock outstanding. The common sto

Question

Akeya Equipment has 6 million shares of common stock outstanding. The common stock has a beta of 1.2 and sells for $50 a share.  The U.S. Treasury bill is yielding 2 percent that is used for the risk-free rate and the return on the market is 12 percent, which indicates that the market risk premium is 10 percent. What is the cost of common equity (RE)?

7.50 percent

10.00 percent

14.00 percent

15.00 percent

18.13 percent

7.50 percent

10.00 percent

14.00 percent

15.00 percent

18.13 percent

Explanation / Answer

Re = rf + (rm – rf) *

= 0.02 + (0.10) * 1.2

= 0.02 + 0.12 = 0.14 = 14%

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