Answer:
10.17%
Explanation:
Use Capital Asset Pricing Model (CAPM) to find the cost of equity; the required rate of return by investors if they choose to buy Southern Bakeries' stock.
CAPM ;r = risk free +Beta(Market risk premium)
risk free = 3.1% or 0.031 as a decimal
Beta = 0.93
Market risk premium = 7.6% or 0.076 as a decimal
CAPM ; r = 0.031 + 0.93 (0.076)
r = 0.031 + 0.07068
r = 0.10168
CAPM rate of return is 10.17%
Therefore, Southern Bakeries' cost of equity = 10.17%
