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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   Add to cart

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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

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  • February 7, 2021
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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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