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mn7861
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Joined: 27 Aug 2009
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Posted: 27 Sep 2009 at 16:02 \| IP Logged

vermore Corporation is computing its cost of using retained earnings for long-term financing under the CAPM model. The risk-free rate of return is 2%, and the market rate of return is 9%. Evermore’s stock fluctuated 3% at the same time the market fluctuated 5%. The cost of retained earnings computed using the CAPM is:

The answer is 6.2. I don't understand becker's explanation. Can someone please explain to me how to do this step by step? Thanks!

kj_nyc
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Joined: 05 Jun 2009
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Posted: 27 Sep 2009 at 16:14 \| IP Logged

CAPM formula: return = Rf + beta(Rm - Rf)
beta = %change in stock price/%change in market price = .03/.05 = .6
return = 2% + .6(9% - 2%) = 2% + 4.2% = 6.2%

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