Question
Prepare a table with the cost of capital (cost of equity) that you would calculate for the equity with the following estimates of the market
Prepare a table with the cost of capital (cost of equity) that you would calculate for the equity with the following estimates of the market risk premium.
4.5%
6.0%
6.5%
7.0%
A financial analyst gives Oracle Corp., the enterprise software and database management firm, a CAPM (Capital Asset Pricing Model) equity beta of 1.20. The risk-free rate is 4%.
The cost of equity under CAPM is calculated using the formula as follows:
Cost of Equity = E( ) = + betai { E( ) - }
where, : risk-free rate,
E( ) - : Market risk premium
betai : beta of individual firm i
Required: Prepare a table with the cost of capital (cost of equity) that you would calculate for the equity with the following estimates of the market risk premium.
4.5%
6.0%
6.5%
7.0%
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