Question: The Allegheny Valley Power Company common stock has a beta of 0.80. If the current risk-free rate is 6.5%(Krf) and the expected return on the common stock as a whole is 16%(Km), determine the cost of equity capital (Ke)for the firm (using the CAPM).
The answers to this problem are one of the following:
a. 14.1%
b. 7.6%
c. 6.5%
d. none of the above