The Dybvig Corporation’s common stock has a beta of 1.5. If the risk-free rate i

Question

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? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Cost of equity capital               %

Can someone please help. The answer on chegg 22.6% is incorrect. Help please!

Cost of equity capital               %

Can someone please help. The answer on chegg 22.6% is incorrect. Help please!

Explanation / Answer

a. Cost of equity (also referred to as cost of common stock) means the minimum rate of return which a company must generate so as to convince investors to invest in the company's common stock at its current market price. It is also known as required rate of return.

b. Risk free rate means the rate of return on short-term treasury bonds.

c. Beta coefficient is a measure of the systematic risk of a company's common stock.

d. Market rate of return is the rate of return on the market

e. Formula under capital asset pricing model ( CAPM ) to calculate the cost of Equity :

Cost of Equity = Risk Free Rate + Beta Coefficient × Market Risk Premium

i.e. Cost of Equity = Risk Free Rate + Beta Coefficient × (Market Rate of Return Risk Free Rate)

f. Cost of Equity for Dybvig Corporation :

Cost of Equity = Risk Free Rate + Beta Coefficient × (Market Rate of Return Risk Free Rate)

= 0.046 + 1.5 * ( 0.12 - 0.046 )

= 0.046 + 1.5 * ( 0.074 )

= 0.046 + 0.111

= 0.157 = 15.7 %( in percentage terms )

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.