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    Which company has higher cost of equity

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    The following table shows necessary (hypothetical) information to calculate the cost of equity by using CAPM model:

    FEDEX CORP RRF 1% RM 4.50% Ã?j 1.26

    MCDONALD CORP RRF 1% RM 4.25% Ã?j 0.43

    E(rj )= RRF + b(RM - RRF)

    E(rj ) - The cost of equity

    RRF - Risk free rate of return)

    Ã?j - Beta of the security

    RM - Return on market portfolio)

    Based on the above information, which company has higher cost of equity? Why?

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    Solution Preview

    E(rj )= RRF + b(RM - RRF)
    = 1% + 1.26(4.50% - 1%)

    Solution Summary

    The expert determines which company has a higher cost of equity.