Cost of Equity: International Considerations
Using the Fama–French model, the required return on equity for Blue Jay is _closest_ to :
Incorrect.
This answer doesn't take into account the risk-free rate.
Correct.
The answer is solved in two steps. First, find the equity risk premium.
$$\displaystyle ERP = R_{M} - r_f = 8.4 \% - 3.7 \% = 4.7 \% $$
Then find the required return on equity.
$$\displaystyle r_e = r_f + (\beta_{mkt}\times ERP)+(\beta_{SMB}\times R_{SMB})+(\beta_{HML}\times R_{HML})$$
$$\displaystyle r_e = 3.7 + (1.1 \times 4.7)+(0.8 \times 1.7)+(-0.4 \times 2.9) = 9.07$$
Incorrect.
This is the required return on equity according to a multifactor model that includes all of the information provided; but the Fama-French model has either 3 or 5 specific factors, and those needed for the three-factor model are provided here.
5.37%.
9.07%.
10.11%.
