May i ask for help on this? Thank you in advance.This question is asking for Cost of equity.Project Beta 1.5Risk free rate 3%Market risk premium 8%Country risk premium for China 2.6%a - 18.9%b- 14.40%c- 10.40%the answer key has 18.9% is correct.but, what i calculated following the formula is 14.40%. Ke = frf+B((Risk premium) - frf + CRP)Ke= 0.03+1.5(0.08-0.03+0.026)Ke= .1440to get 18.9% i have to exclude 0.03 from risk premium. but if i do it according to formula is .1440.

Hi @fmccray , of course you can ask questions, that's what this community is for :)Your formula is correct: Ke = risk-free rate (rfr) + B [ E(Rm) - rfr + CRP ]However, the question had a little "trick" here, where they provided the info Market Risk Premium = E(Rm) - rfr = 8%, which already takes into account the risk free rate, hence a 'premium' over the rfr.So your Cost of Equity, Ke = rfr + B*[8% + CRP] = 3% + 1.5*(8% + 2.6%) = 18.9%

A CFA Level 1 Discussion About Cost Of Capital

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This topic has 2 replies, 2 voices, and was last updated Jan-2112:15 pm by fmccray.

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- Sophie Macon
  Keymaster
  03 Jan 2021 at 6:44 am
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  Hi @fmccray , of course you can ask questions, that’s what this community is for 🙂
  
  Your formula is correct: Ke = risk-free rate (rfr) + B [ E(Rm) – rfr + CRP ]
  
  However, the question had a little “trick” here, where they provided the info Market Risk Premium = E(Rm) – rfr = 8%, which already takes into account the risk free rate, hence a ‘premium’ over the rfr.
  
  So your Cost of Equity, Ke = rfr + B*[8% + CRP] = 3% + 1.5*(8% + 2.6%) = 18.9%
- fmccray
  Participant
  - CFA Level 1
  03 Jan 2021 at 12:15 pm
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  Thank you Sophie.
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