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The yield on a three-month T-bill is 4%, the yield on a 10-year T-bond is 5.36%. the market risk premium is 10.18%. and the Allen Company has a beta of 1.25. Using the Capital Asset Pricing Model (CAPM) approach, Allen’s cost of equity is:_______

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Answer: 18.09%

Explanation:

Capital Asset Pricing Model = Risk free rate + beta * Market premium

= 5.36% + 1.25 * 10.18%

= ‭0.18085‬

= 18.09%

Note: Use the yield on a 10-year T-bond as long term risk free rates take into account more volatility.

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