CAPM - . Basically, we take the component parts of the cost...

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According to the CAPM, what should  be the required rate of return on  Aribelle’s Advertising, Inc stock? k j  = 0.0175 + 1.79*(0.0775 -  0.0175) k j  = 0.0175 + 1.79*(0.06)  k = 0.0175 + 0.1074  k = 0.1249 =  12.49% According to the CAPM, Aribelle’s  Advertising stock should be priced  to give a  12.49%  return. The Build Up Method This is an  ad hoc  method of  estimating the cost of capital for  poorly diversified investors . The build up method is much more  commonly used for small   businesses
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Unformatted text preview: . Basically, we take the component parts of the cost of equity and combine them with addition. Component Costs:-Bond Yield-Equity Risk Premium-Micro-Cap Risk Premium-Liquidity (i.e. Start-Up) Risk Premium Suppose the Treasury bond rate is 2.25% , the equity risk premium is 5.75% , the micro-cap premium rate is 2.75% , and the start-up risk premium is 3.25% . Using the Build-up Method, what is the required rate of return on this equity?...
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CAPM - . Basically, we take the component parts of the cost...

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