Response to the following problem:
The Charlotte Honey Company is considering issuing new stock and is evaluating its cost of equity capital. Charlotte expects a riskfree rate of interest of 5% and a return on the market of 12%.
a. If Charlotte's common stock has a beta of 1.0, what is the expected cost of common stock using the Capital Asset Pricing Model?
b. If Charlotte's common stock has a beta of 2.0, what is the expected cost of common stock using the Capital Asset Pricing Model?
c. If Charlotte's common stock has a beta of 3.0, what is the expected cost of common stock using the Capital Asset Pricing Model?