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Chapter 4: Q1P (page 379)

Question:Assume that Rf = 5 percent and Km 5 = 10.5 percent. Compute Kj for the following betas, using Formula 11A-2.

a. 0.6

b. 1.3

c. 1.9

Short Answer

Expert verified

Answer

  1. The Kj for beta 0.6 is 8.3%
  2. The Kj for beta 1.3 is 12.15%
  3. The Kj for beta 1.9 is 15.45%

Step by step solution

01

Meaning of Cost of Capital

Cost of capital refers to a metric used to calculate the minimum return a business must earn to cover the cost incurred in the capital project.

02

Computation of Kj

Kj=Rf+尾(Km-Rf)=5%+0.6脳(10.5%-5%)=8.3%

03

Computation of Kj

Kj=Rf+尾(Km-Rf)=5%+1.3脳(10.5%-5%)=12.15%

04

Computation of Kj

Kj=Rf+尾(Km-Rf)=5%+1.9脳(10.5%-5%)=15.45%

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