According to CAPM Estimates, What Is the Cost of Equity

question 41

Multiple Choice

According to CAPM estimates, what is the cost of equity for a firm with beta of 1.5 when the risk-free interest rate is 6% and the expected return on the market portfolio is 15%?

• A)19.5%
• B)21.0%
• C)22.5%
• D)24.0% Expected return on stock = 6% + 1.5(15% - 6%)
• = 6 + 13.5

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Definitions:

Operating Activities

Business activities directly related to the production and delivery of goods and services, affecting the operating income.

Depreciation Expense

The allocation of the cost of a tangible asset over its useful life, reflecting wear and tear or obsolescence.

Direct Method

A cash flow statement presentation that lists specific types of cash receipts and payments, used to reveal actual cash flow activities.

Accounts Receivable

Indicates the funds to be received by a business for credit sales made to customers, reflecting potential income.