Jkl corporation, a company devoted primarily to paper products, is estimating the cost of equity appropriate for a vegetable processing plant it is planning to build. jkl corp. has an equity beta of 1.0 and a debt ratio (d/(d+e)) of 0.3. a comparable (vegetable processing) firm has an equity beta of 0.8 and a debt ratio of 0.2. assume a risk-free rate of 5% and a market risk premium of 8%. what cost of equity should jkl use in this situation?

Ke13% according to CAPM

Explanation:

We calculate the cost of equity using the CAPM

risk free0.05

market rate  

premium market= (market rate - risk free)= 0.08

beta(non diversifiable risk) = 1

We have to use the beta of the firm.

The beta of a comparable firm is used when we lack information for our own firm.

Ke0.13000 = 13%

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