Capital Asset Pricing Model

Where is this question from? Is it this one? A company has an asset beta of 1.25 and a debt beta of 0.20. The market value of the company’s equity is $150m and the market value of its debt is $50m. The market premium is 8% and the risk-free rate is 6%. The tax rate is 30%. What is the company’s cost of equity (to one decimal place of a percentage)? A.18.0% B.9.0% C.16.0% D.8.5%

Ba = Be * E/E + D1-t 1.25 = Be * 3/(3+.7) 1.25 = Be * 3/3.7 1.25 = Be * 0.8108 Be = 1.54 approx So 6 +( 8 ) * 1.54 = 18% approximately

Hi, you worked out the question I'm referring to. Where did the three come from? And what is the first formula you showed?

This is the working on the study hub. 1.25 = (150/(150 + 35)) × ?e + (35/185) × 0.20 ?e = 1.495 (I sent the previous question multiple times by accident.)

The 3 and 1 are just proportions of Equity and Debt That is how I do beta equity and beta asset

1.25 = (150/(150 + 35)) × ?e + (35/185) × 0.20 ?e = 1.495 This considers the debt beta, which I missed 1.25 = (150/(150 + 35)) × ?e + (35/185) × 0.20

This is the complete working from the study hub. 1.25 = (150/(150 + 35)) × ?e + (35/185) × 0.20 ?e = 1.495 Use CAPM to find the cost of equity as 6% + (1.495 × 8%) = 17.96% i.e. 18.0% to one decimal place of a percentage.

I have answered your question have I not I said I had missed the debt beta at 0.2 So if you put this in it will be as per above…… Time to move on When all said and done I got 18% they got 18%