Example of Capital Asset Pricing Model
KK Ltd is an all equity firm whose Beta factor is 1.2, the interest rate on T. bills is currently at 8.5% and the market rate of return is 14.5%. Conclude the cost of equity K_{e}, for the company.
Solution
R_{f} = 8.5% , R_{m} = 14.5% and Beta of equity = 1.2
K_{e} = R_{f} + (R_{m} - R_{f})B_{E}
= 8.5% + (14.5% - 8.5%) 1.2
= 8.5% + (6%)1.2
= 15.7%