EXAMPLEEXAMPLE

If the appropriate equity premium lies between $3\%$ and $5\%,$ what is the cost of equity for

Allied, whose bonds yield $8\%?$

Allied $r_5$

In regards to Allied, the risk$-$free rate equals $4\mathrm{.}5\%,$ the market risk premium is $5\%,$ and the

firm's beta is $1\mathrm{.}50.$ What is the company's cost of equity from retained earnings?

$r_5=$

We could use an Excel Data Table to calculate $r_5$ at different betas: