Marvelous at the Mall Inc. has a before-tax cost of debt of 8.00%, but
Marvelous at the Mall Inc. has a before-tax cost of debt of 8.00%, but the risk-free rate is only 3.00%. If the market risk premium for equity is 6.00% and the firm has a beta of 1.25, what is the required return on equity for the firm?
A) 10.50%
B) 11.00%
C) 11.50%
D) 12.00%
ANSWER
A
Explanation: A) ke = rf + beta * (Mkt risk premium) = 3% + 1.25 (6%) = 10.50%.
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