We have been provided with the informaion that

Dewing Drilling has a beta of 1.3

the risk-free rate of return is 8%

the expected return to the market is 12%,

the firm’s tax rate is 40%

what is the firm’s cost of equity

the most commonly accepted method for calculating cost of equity comes from the Nobel Prize-winning capital asset pricing model (CAPM): The cost of equity is expressed formulaically below:

Re = rf + (rm – rf) * β

Where:

• Re = the required rate of return on equity
• rf = the risk free rate
• rm – rf = the market risk premium
• β = beta coefficient = unsystematic risk

Re = 8%+(12-8)*1.3

= 8%+5.2

=13.2%