ACCA FM · Chapter 11 · Question 4 of 11
The risk-free rate is 4%, the expected return on the market portfolio is 11% and a company's equity beta is 1.3. Using the capital asset pricing model (CAPM), what is the company's cost of equity?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 13.1%
Explanation
CAPM: Ke = Rf + beta x (Rm - Rf) = 4% + 1.3 x (11% - 4%) = 4% + 1.3 x 7% = 13.1%. A common error is to multiply beta by the market return rather than by the market risk premium, giving 18.3%.
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