May i ask for help on this? Thank you in advance.
This question is asking for Cost of equity.
Project Beta 1.5
Risk free rate 3%
Market risk premium 8%
Country risk premium for China 2.6%
a – 18.9%
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)
to 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%
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