Consider the following information:
30 day T-Bill rate (Risk free rate) 8.0%
Common stock Beta 1.2 -
Expected rate of return for the market 12.0%
Asset turnover ratio 3.4x -
Calculate this firm's cost of retained earnings using the CAPM approach.
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A. B. C. D. E. F.B
To calculate the cost of retained earnings for a firm using CAPM, one may use the following formula: Cost of retained earnings = risk free rate + [(expected rate of return on the market - risk free rate) x Beta]. In this case, the cost of retained earnings = 8.0% + [(12.0% - 8.0%) x 1.2] = 12.8%.