Question
Need assistance with CAPM Calculations - Company in question is Flight Centre: Valuation analysis with the CAPM estimation You need 3 variables to calculate the
Need assistance with CAPM Calculations - Company in question is Flight Centre:
Valuation analysis with the CAPM estimation
You need 3 variables to calculate the CAPM:
- Estimate Beta ():You can estimate beta by using regression analysis Or by manual calculation
For both approach you need to use the stock price data of
the company and ASX/S&P200 to estimate return for five year
Then follow the formula of beta estimation
- Risk-Free Rate of Return: Take the 10 year Govt. bond yield rate as a proxy for RFR - Risk Premium: It is the difference between expected market return E(Rm) and RFR
We have provided E(Rm)= 9.826% [source: Bloomberg]
Once you estimate the CAPM required rate of return denoted as E(Re) following the steps
above, you can use this return (also known as cost of equity, Ke) in the valuation model
Using different models to estimate the intrinsic value of the company.- Estimate the dividend discount model or dividend valuation model (DDM) - Estimate the free cash flow to equity model (FCFE)
Dividend Valuation Model (DDM):- Use CAPM return
- Estimate the average 5-year growth rate (g = Retention ratio x DuPont ROE) - Use assumptions if necessary
- Forecast dividends
- Estimate intrinsic share price
Free Cash Flow to Equity (FCFE):
- Growth rate of FCFE (you can take changes in FCFE values over the past five years to predict the growth rate)
- Use assumptions if necessary - Forecast FCFE
- Estimate intrinsic share price
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