The following information is available for a firm in a developing country: 2.0% 1.5 Risk-free rate Firm's equity beta Equity risk premium in a developed country Developing country risk premium Sovereign yield spread What is the firm's cost of equity using the CAPM approach? 3.0% 4.0% 2.5%

The following information is available for a firm in a developing country: 2.0% 1.5 Risk-free rate Firm's equity beta Equity risk premium in a developed country Developing country risk premium Sovereign yield spread What is the firm's cost of equity using the CAPM approach? 3.0% 4.0% 2.5%

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter14: Security Structures And Determining Enterprise Values

Section: Chapter Questions

Problem 1hM

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

The following information is available for a firm in a developing country:
Risk-free rate
Firm's equity beta
Equity risk premium in a developed country
Developing country risk premium
Sovereign yield spread
What is the firm's cost of equity using the CAPM approach?
2.0%
1.5
3.0%
4.0%
2.5%

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