According to the Capital Asset Pricing Model (CAPM), if the risk-free rate Rf = 6%, the expected market return Rm = 14%, and stock beta beta = 1.25, what is the cost of equity Ke?

Option A: 16.0%. Solution: Correct Answer: Option A Explanation: Using the CAPM formula: Ke = Rf + beta (Rm - Rf) Given: - Rf = 6% - Rm = 14% - beta = 1.25 Ke = 6% + 1.25 x (14% - 6%) = 6% + 1.25 x 8% = 6% + 10% = 16.0% Hence, the required return is 16.0%.

According to the Capital Asset Pricing Model (CAPM), if the risk-free rate $R_f = 6\%$, the expected market return $R_m = 14\%$, and stock beta $\beta = 1.25$, what is the cost of equity $K_e$?

The correct answer is Option A: 16.0%. Correct Answer: Option **A** Explanation: Using the CAPM formula: $$K_e = R_f + \beta (R_m - R_f)$$ Given: - $R_f = 6\%$ - $R_m = 14\%$ - $\beta = 1.25$ $$K_e = 6\% + 1.25 \times (14\% - 6\%) = 6\% + 1.25 \times 8\% = 6\% + 10\% = 16.0\%$$ Hence, the required return is 16.0%.

Advanced Financial Management (AFM)Question 5827 of 10

All Questions

According to the Capital Asset Pricing Model (CAPM), if the risk-free rate $\displaystyle R_f = 6\%$ , the expected market return $\displaystyle R_m = 14\%$ , and stock beta $\displaystyle \beta = 1.25$ , what is the cost of equity $\displaystyle K_e$ ?

Options

A16.0%

B15.0%

C17.5%

D13.5%

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Correct Answer

✅ Option A — 16.0%

All Options:

A16.0% ✓
B15.0%
C17.5%
D13.5%

Detailed Solution & Explanation

Correct Answer: Option **A** Explanation: Using the CAPM formula:

K_e = R_f + \beta (R_m - R_f)

Given: -

\displaystyle R_f = 6\%

\displaystyle R_m = 14\%

\displaystyle \beta = 1.25

K_e = 6\% + 1.25 \times (14\% - 6\%) = 6\% + 1.25 \times 8\% = 6\% + 10\% = 16.0\%

Hence, the required return is 16.0%.

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According to the Capital Asset Pricing Model (CAPM), if the risk-free rate Rf=6%\displaystyle R_f = 6\%Rf​=6%, the expected market return Rm=14%\displaystyle R_m = 14\%Rm​=14%, and stock beta β=1.25\displaystyle \beta = 1.25β=1.25, what is the cost of equity Ke\displaystyle K_eKe​?