Question

Aluminum maker Alcoa has a beta of about 1.95​, whereas Hormel Foods has a beta of 0.44. If the expected excess return of the market portfolio is 6​%, which of these firms has a higher equity cost of​ capital, and how much higher is​ it?

1: Alcoa's equity cost of capital is

​(Round to two decimal​ places.)

2: ​Hormel's equity cost of capital is

​(Round to two decimal​ places.)

3: ​Therefore, Alcoa has the higher equity cost of capital by

percentage points.  ​(Select from the​ drop-down menus and round to two decimal​ places.)​

Answer 1

Answer:

Alcoa's equity cost of capital = 1.89 × 0.06 = 0.1134 or 11.34%

Hormel Foods equity cost of capital = 0.42 × 0.06 = 0.0252 or 2.52%

Alcoa has a higher equity cost of capital by 8.82%