example of capital asset pricing modelkk ltd is

Question

Example of Capital Asset Pricing Model

KK Ltd is an all equity firm whose Beta factor is 1.2, the interest rate on T. bills is currently at 8.5% and the market rate of return is 14.5%.  Conclude the cost of equity K_e, for the company.

Solution

R_f = 8.5% , R_m = 14.5%  and Beta of equity = 1.2

K_e   = R_f + (R_m - R_f)B_E

       = 8.5% + (14.5% - 8.5%) 1.2

       = 8.5% + (6%)1.2

       = 15.7%