CA Inter P6 · Chapter 4 · Question 5 of 10
The risk-free rate is 6%, the expected market return is 13% and the beta of Tejas Ltd's equity shares is 1.3. Using CAPM, the cost of equity is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) 15.1%
Explanation
Ke = Rf + β(Rm - Rf) = 6% + 1.3 x (13% - 6%) = 6% + 9.1% = 15.1%. Multiplying beta by the full market return (16.9%), or adding Rf to that product (22.9%), ignores that beta applies only to the market risk premium. The figure 9.1% is the risk premium alone.
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