Hello this is me again:

Question 1:

Our discussion topic concerns the calculation of stock values using the Capital Asset Pricing Model (CAPM). Explain the CAPM model. The textbook provides a list of betas for a selection of stocks. Choose two firms from that list and discuss whether the betas are what you would expect. Be sure to explain why or why not. Calculate the returns based on the CAPM model. Be sure to state your assumptions.

Question 2:

For your second post, the Weighted Average Cost of Capital (WACC) for a firm can be calculated or found through research. Select two firms in the same industry. The industry may be that in which you currently work or it may be an industry in which you are interested. Calculate or find the WACC for the two firms. How do the WACCs compare? Are the WACCs what you would expect? What causes the differences between the two firms' WACCs?

Question 3:

For your next post, review the findings of another student. Explain in detail why the CAPM or the WACC for these firms differ from each other. If you were the Stock Analyst, what would be your recommendations?

For example this is for one of my friend:

Hi class,

In my second post, I will define WAAC and use the related mathematical equation to calculate WACC for two chosen companies.

I. Def: WACC ( The Weighted Average Cost of Capital)

Per standard definition WACC is;

"The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is commonly referred to as the firm's cost of capital. Generally speaking, a company's assets are financed by debt and equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances." (Cost of Capital, Iterative Process Using CAPM, James R. Morris, Page 576, 2014) [1]

In simple language, WACC provides management with vital information about its capital structure, and how risky/costlyis to raise capital. The higher the WACC, the riskier and costlier is to finance the activities of a business entity.

II. Two companies

a) Merck (NYSE:MRK)

All data extracted from guruficus.com [2]

E= Market value of the IBM's equity = $ 170115.62 Million

D= Market value of the IBMs debt = $ 23958.5 Million

Re = cost of equity = 7.185%

Rd = cost of debt = 2.8049 %

T = corporate tax = 24.195%

WACC = (E/E+D)*Re + (D/E+D)*Rd* (1- T)

= (170115.62 /170115.62 +23958.5 ) *7.185% + (23958.5/23958.5+170115.62)*2.8049% * (1 - 0.24195) = 6.56%

b) IBM (NYSE: IBM)

(All data extracted from gurufocus.com) [3]

E= Market value of the IBM's equity = 148519.06 Million

D= Market value of the IBMs debt = $ 403055.5 Million

Re = cost of equity = 7.635%

Rd = cost of debt = 1.1611 %

T = corporate tax = 18.685%

WACC = (E/E+D)*Re + (D/E+D)*Rd* (1- T)

= (148519.06 /148519.06 +403055.5)*7.635% + (403055.5/403055.5 +148519.06)*1.1611 %*(1 - 0.18685) = 6.21%

The calculation of respective WACC yields that the cost of capital is almost the same for thesescompanies. So if one intends to invest in, WACC would not be the difference between theseentities. A comprehensive record of the key business ratios, stock analysis and market position are needed to pass the final hurdle in order toinvestineithercompany.

[1] Journal Title; Cost of Capital Article Title: Iterative Process Using CAPM Author: James R. Morris Pages: Nonconsecutive 576, 608 Date: 2014 [2]http://www.gurufocus.com/term/wacc/MRK/Weighted%2BAverage%2BCost%2BOf%2BCapital%2B%2528WACC%2529/Merck%2B%2526%2BCo%2BInc[3] http://www.gurufocus.com/term/wacc/IBM/Weighted-Average-Cost-Of-Capital-WACC/International-Business-Machines-Corp