This is the risk-free rate multiplied by the beta. The CAPM incorporates more information than this. The CAPM formula is R = R F + β(RM ? R F). β(RM ? R F) is the individual security's risk premium. To that, we add the risk-free rate to get the cost of the company's common equity, which is the same thing as the investors' required rate of return for the stock (R).
The CAPM formula is: R = R F + β(RM ? R F). The difference between the expected market return and the risk-free rate multiplied by the company's beta is the individual security's risk premium. To that, we add the risk-free rate to get the cost of the company's common equity, which is the same thing as the investors' required rate of return for the stock (R). In this question all we need to do is to put the information from the question into the formula. The risk free rate is 7%, the market rate is 15% and the beta for the company is 1.25. This gives us: .07 + [1.25 (.15 ? .07)]. This is equal to 17%.
This is simply the expected market return. The CAPM formula is R = RF + β(RM ? R F). The difference between the expected market return and the risk-free rate multiplied by the company's beta is the individual security's risk premium. To that, we add the risk-free rate to get the cost of the company's common equity, which is the same thing as the investors' required rate of return for the stock (R).
This answer does not add the risk free rate to the calculation of the individual security's risk premium. The CAPM formula is R = R F + β(RM ? R F). β(RM ? R F) is the individual security's risk premium. To that, we add the risk-free rate to get the cost of the company's common equity, which is the same thing as the investors' required rate of return for the stock (R).
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Additional Data: The long term debt was originally issued at par ($1,000 per bond) and is currently trading at $1,250 per bond. Martin Corporation can now issue debt at 150 basis points over U.S. treasury bonds. The current risk-free rate (U.S. Treasury bonds) is 7%. The expected market return is currently 15%. The beta for Martin is 1.25. Martin's effective corporate income tax rate is 40%.. Using the Capital Asset Pricing Model (CAPM), Martin Corporation's current cost of common equity is: