Question

For dairy Ltd. Beta is 0.8, Nifty Returns=15% and T-bill rate is 8% what is the cost of equity?
Options : 0.15
0.08
0.056
0.07

Answer 1

Answer:  The cost of equity works out to 13.6% as per the CAPM. None of the answers given are the answers to the question. However, the risk premium of Dairy Ltd, works out to 0.056.

We use the Capital Asset Princing Model or CAPM in order to calculate the cost of equity, required rate of return on an asset or the discount rate.

The formula for computing the cost of equity is:

$mathbf{k_{e}= r_{f}+\beta (r_{m}-r_{f})}$

In the formula above, the term $\beta (r_{m}-r_{f})}$ refers to the risk premium of the given security, and it represents the rate of return that the security must give over and above the return obtained on T-bills.

Substituting the values in the formula above we get,

$\mathbf{k_{e}= 0.08+0.8 (0.15-0.07)}$

$\mathbf{k_{e}= 0.08+0.056}$

$\mathbf{k_{e}= 0.136}$

Answer 2

Answer:

0.15

Explanation: