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:

$\text{Cost of equity}=\text{Riskfree rate}+\left(\text{Beta}\times \left(\text{Market rate}-\text{Riskfree rate}\right)\right)$

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

Calculate the cost of equity as follows:

$\text{Cost of equity}=\frac{\text{Expected dividend}}{\text{Current price}}+\text{Growth rate}$

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%.