Categories
This Month's Leaders
Recommended Discussions
See how our partners can help you ace your CFA exams.
|
|
|
|
Cost of Capital
in CFA Level I
May i ask for help on this? Thank you in advance.
This question is asking for Cost of equity.
Project Beta 1.5
Risk free rate 3%
Market risk premium 8%
Country risk premium for China 2.6%
a - 18.9%
b- 14.40%
c- 10.40%
the answer key has 18.9% is correct.
but, what i calculated following the formula is 14.40%.
Ke = frf+B((Risk premium) - frf + CRP)
Ke= 0.03+1.5(0.08-0.03+0.026)
Ke= .1440
to get 18.9% i have to exclude 0.03 from risk premium. but if i do it according to formula is .1440.
Copyright © 300 Hours. All Rights Reserved. See full disclaimer.
CFA Institute does not endorse, promote or warrant the accuracy or quality of 300 Hours. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
CFA Institute does not endorse, promote or warrant the accuracy or quality of 300 Hours. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Comments
Hi @fmccray , of course you can ask questions, that's what this community is for :)
Your formula is correct: Ke = risk-free rate (rfr) + B [ E(Rm) - rfr + CRP ]
However, the question had a little "trick" here, where they provided the info Market Risk Premium = E(Rm) - rfr = 8%, which already takes into account the risk free rate, hence a 'premium' over the rfr.
So your Cost of Equity, Ke = rfr + B*[8% + CRP] = 3% + 1.5*(8% + 2.6%) = 18.9%
Thank you Sophie.