Beta and cost of equity capital
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Last week the price of a company's common stock closed at $27.00 per share. Use the weekly stock price and index value data in the table below to compute the company's beta, then use the beta to estimate the company's required cost of equity. Assume the appropriate risk-free rate is 5.5% and the market risk premium is 6.5%.
Beta = ________ Company's Cost of Equity Capital = _______ %
First day of the month Closing Prices for the company and Market Index
April 2009 through October 2009
Date Company S&P500
10/9/09 27.000 1096.56
10/2/09 26.500 1071.49
9/25/09 26.100 1025.21
9/18/09 25.500 1044.38
9/11/09 25.250 1068.30
9/4/09 24.500 1042.73
8/28/09 24.650 1016.40
8/21/09 25.375 1028.93
8/14/09 25.750 1026.13
8/7/09 25.250 1004.02
7/31/09 25.250 1010.48
7/24/09 24.000 987.48
7/17/09 24.850 979.26
7/10/09 23.400 940.38
7/3/09 22.750 879.13
6/26/09 23.700 896.42
6/19/09 25.250 918.90
6/12/09 25.500 921.23
6/5/09 26.000 946.21
5/29/09 26.600 940.09
5/22/09 24.750 919.14
5/15/09 24.750 887.00
5/8/09 24.250 882.88
5/1/09 24.500 929.23
4/24/09 23.500 877.52
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The solution explains how to calculate beta and the cost of equity
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