Question
1. You have been asked to calculate the cost of equity using the Capital Asset Pricing Model (CAPM).The CFO estimates the Beta as 0.90.Management wants
1. You have been asked to calculate the cost of equity using the Capital Asset Pricing Model (CAPM).The CFO estimates the Beta as 0.90.Management wants to use the 30 year bond rate as the risk free rate, arguing that Investors should make long term investments; that rate is 3% today.The expected return on the stock market as a whole has been estimated to be 7%, 10% and 12% by various studies.The CFO asks that you use an expected return of 9% for the average stock.The market risk Premium (RPM) will be 6%.9% minus 3% = 6%.
Calculate the cost of equity (Rs) using the CAPM.The formula isRs = rRF + (RPM ) x .Rsis the required return on equity or the Cost of Equity, rRF is the risk free rate, RP M is the required stock market return in excess of the risk free rate, and , (Beta) is the stocks relative risk. is also described as the estimate of the amount of risk that an individual stock contributes to a well balance portfolio.
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Youve laid out the concept perfectly Lets calculate the cost of equity Rs using CAPM based on the information provided Given Beta 090 Riskfree rate rRF 3 Market Risk Premium RPM Expected market return ...Get Instant Access to Expert-Tailored Solutions
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