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CA Intermediate · Financial Management and Strategic Management · Cost of Capital

Meera Industries has an equity share with a risk-free return of 7%, market return of 13% and beta of 1.5. Using the CAPM, what is the cost of equity?

The cost of equity is 16%. Under CAPM it equals the risk-free rate of 7% plus beta of 1.5 times the market risk premium of 6% (13% minus 7%), which gives 7% plus 9%, i.e. 16%.

  1. A16%Correct
  2. B19.5%
  3. C9%
  4. D14.5%

Explanation

Ke = Rf + β(Rm − Rf) = 7 + 1.5 × (13 − 7) = 7 + 9 = 16%. Option 19.5% wrongly multiplies beta by the market return (1.5 × 13). Option 14.5% adds beta times 13 less something incorrectly; 9% is only the risk premium without Rf.

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