1. The current risk-free rate of interest is 4% and the expected return on the market is 12%.
a. Calculate the cost of equity (required rate of return) for a stock with a Beta = 0.75.
b. Using EXCEL’s Data Table feature create a two-way data table to determine the cost of equity by varying both Beta and the risk-free rate of interest. Use Beta values of 0.6, 0.8, 1.0, 1.2, and 1.4 and risk-free interest rate values of 6%, 8%, and 10%.
C. Explain how the cost of equity is impacted by an increase in Beta. d. Explain how the cost of equity is impacted by an increase in the risk-free rate of interest.
