Question 177 BPP

This topic has 1 reply, 2 voices, and was last updated 9 years ago by John Moffat.

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December 9, 2016 at 3:13 am #362501
furqan.90
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Hi John,

Why was the the risk free rate not deducted from market rate,shouldnt it have been (1.3 × [8-3]%)
13.4%
The equity beta relates to the cost of equity, hence gearing and the debt beta are not relevant.
E(ri) = Rf + ? (E(Rm) – Rf) = 3% + (1.3 × 8%) = 13.4%
December 9, 2016 at 7:19 am #362536
John Moffat
Keymaster
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The question does not give the market rate. It gives the market premium which is the excess of the market rate over the risk free rate (and so the market rate is actually 11%).
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