In financial analysis, it is important to select an appropriate discount rate. A project's discount rate must be high to compensate investors for the project's risk. The return that shareholders require from the company as a compensation for their investment risk is referred to as the cost of equity.

Consider this case:

The Shoe Building Inc. is a $100\%$ equity$-$financed company $($no debt or preferred stock$)$; hence, its WACC equals its cost of common equity. The Shoe Building Inc.$\text{'}$s retained earnings will be sufficient to fund its capital budget in the foreseeable future. The company has a beta of $1\mathrm{.}50,$ the risk$-$free rate is $5\mathrm{.}0\%,$ and the market return is $6\mathrm{.}5\%.$

What is The Shoe Building Inc.$\text{'}$s cost of equity?

$9\mathrm{.}82\%$

$7\mathrm{.}25\%$

$2\mathrm{.}32\%$

$23\mathrm{.}54\%$