A company owns 50 million shares that trade at $4 each, and $200 million of debt. This is risk-free and has an interest rate of 5%. The expected return on the company's shares is 11%. Suppose that an event in the environment that affects the company causes its stock price to drop 37.5%, to $2.5 per share. The value of risk-free debt remains unchanged. If it is accepted that there are no taxes, what would be the cost of equity capital or return on the share?

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The cost of equity capital often referred to as the required rate of return or cost of equity can be View the full answer