OBrien Inc has the following data rRF 500 RPM 600 and b 1

O\'Brien Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.10. What is the firm\'s cost of equity from retained earnings based on the CAPM?

Solution

Solution:

Cost of Equity = Risk free return + Beta * ( Market risk premium)

Risk free return = 5 %

Market risk premium = 6 %

beta = 1.10

Cost of Equity = 5 % + 1.10 * 6 %

Cost of Equity = 11.60 %