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 Summary
The expert determines which company has a higher cost of equity.
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FEDEX CORP
E(rj )= RRF + b(RM - RRF)
= 1% + 1.26(4.50% - 1%)
...
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