Given the beta of a firm’s shares is 0.9 and expected return to the market is 8%, calculate the cost of equity capital for the firm.  The risk-free rate of return is 4%.   Question 19 options:   1)  4%   2)  7.6%   3)  8%   4)  None of the above

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A: Using CAPM

Q: question is related to FINANCIAL RISK MANAGEMENT

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

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A: Beta = b = 0.90  Risk free rate = rf = 4.25% Market risk premium = mrp = 5.50%

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A: Step 1: To find the difference between Company A's and Company B's required rates of return, we will…

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Q: risk

A: Required return = Risk free rate + Market risk premium * Beta

Q: None

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Q: Please correct answer and step by step solution

A: Step 1 Step 2 Step 3 : Step 4

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A: Risk free rate = 3% Market risk premium = 8% Beta = 0.90

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A: Given data; beta of stock = 1.50 risk free rate = 4.25% market risk premium = 5.50%

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A: Return on stock A = 10% Beta of stock A = 1 Return on stock B = 8% Beta of stock B = 0.5

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.