Answered: The current risk-free rate of return is…

The current risk-free rate of return is 4.2%. The market risk premium is 6.6%. Allen Co. has a beta of 0.87. Using the Capital Asset Pricing Model (CAPM) approach, Allen's cost of equity is

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 7P

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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

The current risk-free rate of return is 4.2%.
The market risk premium is 6.6%. Allen Co.
has a beta of 0.87. Using the Capital Asset
Pricing Model (CAPM) approach, Allen's cost
of equity is

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