CFIN
CFIN
6th Edition
ISBN: 9780357144039
Author: BESLEY
Publisher: CENGAGE L
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Chapter 8, Problem 20PROB
Summary Introduction

CAPM: Capital asset pricing model. This is the method used to find required rate of return, for given level of risk.

Calculate the cost of equity are as follows:

Cost of equity=Riskfree rate+(Beta×(Market rateRiskfree rate))

Cost of new common stock is the cost incurred by the company for issue new common stock.

Calculate the cost of equity as follows:

Cost of equity=Expected dividendCurrent price+Growth rate

HE has current price is $37.5 and Current dividend of $2. Risk free rate is 4% and beta is 1.1 and market return is 10%.

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