In this workout, we're asked to calculate the cost of equity. Let's start by looking at the information Well we're given a Beta of 1.5 and a Beta says to me that we should probably use the capital asset pricing model Let's see if we've got the other components of the CAPM. We've got a risk free interest rate, so yes that's Rf in CAPM We've got a market risk premium, so that's Rm-Rf (your market return minus your risk free rate return) We're then given a tax rate, that's nothing to do with CAPM and we're given a leverage ratio. Again nothing to do with CAPM If we look at those top three, that is enough to come up with our cost of equity, therefore CAPM is the model we're going to use So let's calculate it at the bottom here, we take our risk free rate of return of 1.5 We then add on the market risk premium of 7%, so I'm already up to 8.5% But then I ask myself, ahh does this company have a Beta above 1 or below 1, or maybe 1 exactly? Well it's got a beta of 1.5, if the stock market were to go up one, this company would go up 1.5 If the stock market went up 10, this company would go up 15 So I multiply it all through and that gets me my cost of equity of 12%