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# Cost of Capital

OklahomaPosts: 24 Associate

This question is asking for Cost of equity.

Project Beta 1.5

Risk free rate 3%

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.

• Posts: 2,025 Sr Partner

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%

• OklahomaPosts: 24 Associate

Thank you Sophie.