question archive Question 3 Paul Sharp is CFO of Fast Rocket Inc
Question 3 Paul Sharp is CFO of Fast Rocket Inc
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Question 3
Paul Sharp is CFO of Fast Rocket Inc. He tries to determine the cost of equity financing for his company. The stock has a beta of 1.18. Paul estimated that the market return is 6.35%. The current rate for 10-year Treasury Bonds is 2.99%. Calculate cost of common equity financing using CAPM - SML formula.
Round the answers to two decimal places in percentage form. (Write the percentage sign in the "units" box)
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The cost of common equity financing =6.95%
Step-by-step explanation
Using CAPM - SML formula.
- Cost of common equity = Risk free rate + Beta * ( Market return - Risk free rate)
where
Risk free T-Bill rate=2.99%
Er(M) = 6.35%
Beta =1.18
Thus
The cost of common equity financing =2.99%+ 1.18 * ( 6.35%- 2.99%)
The cost of common equity financing =6.95%
