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Summary GB 550M.docx A Investment Project Value GB550 Financial Management Unit 3 Assignment Purdue Global University Investment Project Value 1. Complete problem: Cost of Equity-CAPM $4.99
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Summary GB 550M.docx A Investment Project Value GB550 Financial Management Unit 3 Assignment Purdue Global University Investment Project Value 1. Complete problem: Cost of Equity-CAPM
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GB 550M3 A Investment Project Value GB550 Financial Management Unit 3 Assignment Purdue Global University Investment Project Value 1. Complete problem: Cost of Equity-CAPM
gb 550m3 01122021docx a investment project value gb550 financial management unit 3 assignment purdue global university investment project value 1 complete problem cost of equity capm
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INVESTMENT PROJECT VALUE 1
Investment Project Value
GB550 Financial Management
Unit 3 Assignment
Purdue Global University
, INVESTMENT PROJECT VALUE
2
Investment Project Value
1. Complete problem: Cost of Equity-CAPM
XYZ, Inc. has a beta of 0.8. The yield on a 3-month T-bill is 5%, and the yield on a 10-year T-
bond is 7%. The market risk premium is 5.5%, and the return on an average stock in the market
last year was 20%. What is the estimated cost of common equity using the CAPM?Show your
work.
Cost of Equity = Risk-free rate + Equity risk premium
= Risk-free rate + (Beta coefficient x market risk premium)
Cost of Equity (Ke) = Rf + (Rm - Rf)
Rf = Risk free rate (7%)
= Beta (0.8)
Rm - Rf = Market risk premium (5.5%)
Therefore,
Ke = 7% + 0.8 (5.5%)
= 0.07 + 0.8 (0.055)
= 0.07 + 0.044
= 0.114
Ke = 11.4%
Therefore, the estimated cost of common equity is 11.4%.
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