Question
Margo Channing, the nancial analyst for Eves Broadway Production Company, has been asked by management to estimate a cost of equity for use in the
Margo Channing, the nancial analyst for Eves Broadway Production Company, has been asked by management to estimate a cost of equity for use in the analysis of a project under consideration. In the past, dividends declared and paid have been very sporadic. Because of this, Ms. Channing elects to use the CAPM approach to estimate the cost of equity. The rate on the short-term U.S. Treasury bills is 3 percent, and the expected rate of return on the overall stock market is 11 percent. Eves Broadway Production Company has a beta of 1.6. What will Ms. Channing report as the cost of equity?
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