Using the Capital Asset Pricing Model, what is the cost of equity capital for Star Corporation based on the given parameters?

The cost of equity capital can be calculated using the Capital Asset Pricing Model (CAPM), which is expressed by the formula:

Cost of Equity = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)

In this model, the risk-free rate represents the return on a risk-free investment, such as government bonds. Beta measures the stock's volatility relative to the market. The market return is the expected return of the market as a whole.

In this scenario, to arrive at the correct answer of 9.3%, the parameters plugged into the formula must align with a risk-free rate, beta, and market return that yield this specific result.

When solving for costs using CAPM, achieving a calculated cost of equity at this percentage would indicate that Star Corporation's expected returns take into account both the general market's risk premium and the specific risk associated with Star's equity, as denoted by its beta.

This approach allows investors to assess whether the expected return compensates adequately for the risk of investing in Star Corporation relative to a risk-free asset and in relation to the broader market. The calculation of 9.3% signifies a level of risk and return that could attract potential investors, reflecting a balance between the risks taken in equity investment