Consider the following information for Company XYZ:
30 day T-Bill rate (Risk free rate) 5.2%
Common Stock Beta 1.1 -
Expected Rate of return for the market 12.0%
Debt Credit Rating BBB -
Calculate this firm's cost of retained earnings using the CAPM approach.
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A. B. C. D. E. F.E
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 = 5.2% + ((12.0% - 5.2%) x 1.1 = 12.68%.