CA Intermediate · Financial Management and Strategic Management · Cost of Capital
Meera Foods Ltd's equity share has a beta of 1.2. The risk-free rate is 7% and the expected market return is 13%. Using CAPM, what is the cost of equity?
Using CAPM, cost of equity equals the risk-free rate plus beta times the market risk premium. That is 7% + 1.2 x (13% - 7%) = 7% + 7.2% = 14.2%.
- A14.2%Correct
- B7.2%
- C15.6%
- D13.0%
Explanation
Ke = Rf + beta x (Rm - Rf) = 7 + 1.2 x (13 - 7) = 7 + 7.2 = 14.2%. Option B gives only the risk premium component of 1.2 x 6. Option C wrongly applies beta to the market return, 1.2 x 13 = 15.6%.
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