CS Executive · Corporate Accounting and Financial Management · Cost of Capital
Meera Foods Ltd has a risk-free return of 7%, an expected market return of 12% and an equity beta of 1.2. Using the CAPM, what is its cost of equity?
The cost of equity is 13%. Under CAPM it equals the risk-free rate of 7% plus beta of 1.2 multiplied by the market risk premium of 5% (12% minus 7%), which adds 6 percentage points.
- A13.00%Correct
- B14.40%
- C12.00%
- D19.20%
Explanation
Ke = Rf + β(Rm − Rf) = 7 + 1.2 × (12 − 7) = 7 + 6 = 13%. The 14.4% figure arises from multiplying beta by the market return (1.2 × 12) and not using the risk premium properly; that is a wrong base.
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