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The Abacus Computer Company has decided to use the Capital Asset Pricing Model to estimate its cost of equity. The firm's beta was estimated at 1.4. The S&P/TSX Composite-stock index has returned 12.5% to investors over a fairly long period of time, and Abacus has decided to use this value as the market return. Treasury bills are currently providing investors with a 6.5% yield.

Required:

Question 1: Calculate Abacus's cost of equity using the CAPM.

Question 2: If its beta was incorrectly estimated, and a new revised estimate of 1.8 was used in the calculations, what would its new estimate of the cost of equity be?

Note: Please explain comprehensively and give step by step solution.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91148449

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