You are using the CAPM to find the appropriate cost of equity for a new project that pays off a little over a year from now. Given the following information, calculate the required rate of return on equity using the CAPM. 30-day T-Bill: 1.2% 1-year Treasury Bond: 3.1% Market Risk Premium: 4% Covariance (Return on Company Stock, Return on S&P 500): 5 Variance (Return on S&P 500): 2.5 (Reminder - Be careful to express this return as a decimal.)
Added by Felipe L.
Step 1
Unfortunately, the question does not provide us with this information, so we cannot use the CAPM formula directly. However, we can estimate the beta using the covariance and variance information given. Beta = Covariance(Return on Company Stock, Return on S&P 500) Show more…
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