According to Moyer  the appropriate market risk premium to use in the Capital Asset Pricing Model (CAPM) is 8 to 9 percent, relative to 90-day Treasury bill rates, while the appropriate market risk premium is 7 percent, relative to long-term government bond income returns (2019). It is imperative that financial analysts use the correct market risk premium with the corresponding risk-free rate when calculating a company's cost of equity with the CAPM. In this discussion forum, you will explore the impact of the assumptions and inputs used in the CAPM on a company's calculated cost of equity.

• Choose a publicly traded company.

-Netflix, Inc. (NFLX)

-Beta 1.26

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• Calculate the company's cost of equity using the CAPM formula and the short-term risk-free rate assumptions.
  • Use 8.5 percent as the market risk premium.
  • Use the current 90-day yield (3-month yield) on U.S. Treasuries as the risk-free rate.
  • Calculate the company's cost of equity using the CAPM formula and the long-term risk-free rate assumptions.
    • Use 7.0 percent as the market risk premium
    • Use the current 20-year yield on U.S. Treasuries as the risk-free rate. Hint: Use the U.S. Department of the Treasury's Resource CenterLinks to an external site. to look up current 20-year Treasury Yield Curve Rates.
    • Provide your calculations in a table in your post.
    • Compare the two different conclusions of the company's cost of equity based on your two calculations (based on short-term and long-term risk-free rates).
    • Hypothesize (rather than calculate) how the different cost of equity estimates would impact the calculation of the weighted average cost of capital for your selected company.
    • Explain the reasoning of your hypothesis. In your explanation, include a discussion of the company's beta and the amount of debt the company has currently.
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