Chapter 4: QA-2P (page 379)

Assume that Rf= 6 percent and the market risk premium (Km -Rf ) is 7.0 percent. Compute Kj for the following betas, using Formula 11A-2.
a. 0.6
b. 1.3
c. 1.9

Short Answer

Expert verified

The Kj for beta 0.6 is 10.42%
The Kj for beta 1.3 is 15.1%
The Kj for beta 1.9 is 19.3%

Step by step solution

Meaning of Cost of Equity

Cost of equity refers to a return that an investor must expect from the company for his investment, which is the cost for the company.

Computation of Kj if the beta is 0.6

$\begin{array}{rcl} K_{j} & = & R_{f} + β (K_{m} - R_{f}) \\ = & 6 % + 0.6 \times (7 %) \\ = & 6 % + 4.2 % \\ = & 10.42 % \end{array}$

Computation of Kjif the beta is 1.3

$\begin{array}{rcl} K_{j} & = & R_{f} + β (K_{m} - R_{f}) \\ = & 6 % + 1.3 \times (7 %) \\ = & 6 % + 9.1 % \\ = & 15.1 % \end{array}$

Computation of Kjif the beta is 1.9

$\begin{array}{rcl} K_{j} & = & R_{f} + β (K_{m} - R_{f}) \\ = & 6 % + 1.9 \times (7 %) \\ = & 6 % + 13.3 % \\ = & 19.3 % \end{array}$

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Assume that Rf= 6 percent and the market risk premium (Km -Rf ) is 7.0 percent. Compute Kj for the following betas, using Formula 11A-2.
a. 0.6
b. 1.3
c. 1.9

Short Answer

Step by step solution

Meaning of Cost of Equity

Computation of Kj if the beta is 0.6

Computation of Kjif the beta is 1.3

Computation of Kjif the beta is 1.9

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Most popular questions from this chapter

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Assume that Rf= 6 percent and the market risk premium (Km -Rf ) is 7.0 percent. Compute Kj for the following betas, using Formula 11A-2.a. 0.6b. 1.3c. 1.9

Short Answer

Step by step solution

Meaning of Cost of Equity

Computation of Kj if the beta is 0.6

Computation of Kjif the beta is 1.3

Computation of Kjif the beta is 1.9

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Intermediate Accounting

Introduction to Business

Organizational Communication

Managerial Economics

Organizational Behavior

Influences On Business

Study anywhere. Anytime. Across all devices.

Assume that Rf= 6 percent and the market risk premium (Km -Rf ) is 7.0 percent. Compute Kj for the following betas, using Formula 11A-2.
a. 0.6
b. 1.3
c. 1.9