after doing my first mock and getting a respectable score, i have now been humbled.
here is a question
stock 1. RFR=2.5, beta=1, ke=8.5
stock 2: RFR=3.5 beta = 1.2 calculate ke
I wont say which is the right (because i dont want to bias the readers) but is the risk premium is 6 from the first (8.5-2.5) and plug it in or do we say that the cost of equity is 8.5 since beta is 1, and the risk premium is 5 (8.5-3.5)?
why or why not?
I would take the ERP of 6 from the first stock and apply it to the second stock. My reason would be that the ERP should remain constant between stocks. The cost of equity shouldn’t.
Why are there two different risk-free rates? Is there not more to the problem?
ERP = (Exp. Return on Mkt - RFR); therefore, as I see it, your problem seems more like a conundrum\riddle.
Nothing for stock 2 can be derived from stock 1 in a CAPM context because each stock is using a different RFR.