Suppose the current risk-free rate of return is 3.5%, and the expected market return is 9%. Fashion Faux-Pas common stock has a beta coefficient equal to 1.4. Using the CAPM approach, compute the firm's cost of retained earnings.

Suppose the current risk-free rate of return is 3.5%, and the expected market return is 9%. Fashion Faux-Pas common stock has a beta coefficient equal to 1.4. Using the CAPM approach, compute the firm's cost of retained earnings.

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter8: Risk And Rates Of Return

Section: Chapter Questions

Problem 14PROB

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Suppose the current risk-free rate of return
is 3.5%, and the expected market return is
9%. Fashion Faux-Pas common stock has a
beta coefficient equal to 1.4. Using the
CAPM approach, compute the firm's cost of
retained earnings.

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