# The Fraber Corporation's common stock has a beta of 0.6. If the risk-free rate is 1.7% and the...

## Question:

The Fraber Corporation's common stock has a beta of 0.6.

If the risk-free rate is 1.7% and the expected return on the market is 10%, what is the company's cost of equity capital? (Do not round intermediate calculations. Enter answer as a percent rounded to 2 decimal places.)

## Capital Asset Pricing Model (CAPM):

The capital asset pricing model (CAPM) is used to ascertain the rate of return required by shareholders of a firm for the equity financing. It takes into consideration the risk-free rate prevailing on the government securities, the beta coefficient for the firm and the market risk premium on the stock.

## Answer and Explanation:

The calculated value of the company's required return is 6.68%.

The market risk premium is given by:

- = Market return - risk-free rate
- = 10% - 1.7%
- = 8.3%

The required rate of return for the company as per the CAPM (Capital Asset Pricing Model) equation is given by:

- = Risk-free rate + (beta * market risk premium)
- {eq}= 1.7\% + (0.6 * 8.3\%) {/eq}

- {eq}= 1.7\% + 4.98\% {/eq}

- = 6.68%

#### Ask a question

Our experts can answer your tough homework and study questions.

Ask a question Ask a question#### Search Answers

#### Learn more about this topic:

from Financial Accounting: Help and Review

Chapter 15 / Lesson 6