Hulu common stock has a? beta, b?, of 0.6. The? risk-free rate is 8%?, and the market return is 16?%.

a.  Determine the risk premium on Hulu common stock.

b.  Determine the required return that Hulu common stock should provide.

c.  Determine? Hulu's cost of common stock equity using the CAPM.

 

a) Risk premium on Hulu common stock = 4.80%

b) Required return = 12.80%

c) Hulu's cost of common stock equity using the CAPM = 12.80%

Step-by-step explanation

a) Computation of the risk premium on Hulu common stock:-

Market risk premium = Market return - Risk free rate

= 16% - 8%

= 8%

Risk premium on Hulu common stock = Beta of the stock * Market risk premium

= 0.6 * 8%

= 4.80%

b) Computation of the required return:-

Required Return = Risk free rate + Risk premium

= 8% + 4.8%

= 12.80%

c) Computation of the Hulu's cost of common stock equity using the CAPM:-

Cost of common stock equity = Risk free rate + Beta * (Market return - Risk free rate)

= 8% + 0.6 * (16% - 8%)

= 8% + (0.6 * 8%)

= 8% + 4.8%

= 12.80%