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Halestorm Corporation's common stock has a beta of 1.15. If the risk-free rate is 3.6% and the...

Question:

Halestorm Corporation's common stock has a beta of 1.15.

If the risk-free rate is 3.6% and the expected return on the market is 11%, what is the company's cost of equity capital?

Cost of Capital

This is the cost of investors' required return from putting their investment in the company's stockholders' equity by purchasing equity securities such as common stocks.

Answer and Explanation:

We will use the below formula to compute for the cost of equity capital:

{eq}E_{s}~=~R_{f}~+~\beta _{s}(R_{m}~-~R_{f})\\ Where:\\ E_{s}~=~expected~return~of~the~security\\ R_{f}~=~risk~free~rate\\ \beta _{s}~=~beta\\ R_{m}~-~market~rate {/eq}


{eq}E_{s}~=~0.036~+~1.15(0.11~-~0.036) {/eq}

Using the above formula, the cost of equity capital of Halestorm's common stock is 12.11%


Learn more about this topic:

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Capital Structure & the Cost of Capital

from Finance 101: Principles of Finance

Chapter 15 / Lesson 1
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