Number 18. Please show work. To estimate the cost of equity capital for a firm u

Question

Number 18. Please show work. To estimate the cost of equity capital for a firm using the CAPM. it is necessary to a. beta, company financial leverage, and the industry beta, b. company financial leverage, beta, and the risk-free rate, c. beta, the risk-free rate, and the market risk premium, d. company financial leverage, beta, and the market risk premium, e. beta, company financial leverage, and the market risk premium. The ABC Corp's common stock has a return of 8.5%. Assume the risk-free rate is 3.0%. the expected market return is 5.5%. and no unsystematic risk affected ABC's return. What is the ABC's beta? a.0.85 b. 1.30 c. 2.20 d. 3.14 e. Impossible to calculate without the inflation rate.

Explanation / Answer

18)

Required return (CAPM) = Rf+×Rp

Rf is risk free return

is beta of the security

Rp is risk premium

8.5% = 3%+×(5.5%-3%)

8.5%-3% = ×2.5%

Beta of the stock, = 2.20

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