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The goal is to use the Capital Asset Pricing Model to calculate the cost of equity for Amazon.com on January 2, 2003, and on January
The goal is to use the Capital Asset Pricing Model to calculate the cost of equity for Amazon.com on January 2, 2003, and on January 2, 2020. Instructions
1) Four sheets of data are available: a.the monthly stock returns of Amazon.com from 1997 to 2019 b.the monthly returns on a value-weighted U.S. total stock market index from 1954 to 2019 c.the monthly yields on 10-year Treasury notes from 1954 to 2019 d.the annualized yields on 10-year Treasury notes in early 2003 and early 2020.
2) Calculate the monthly returns of Amazon and the stock market index in excess of the 10-year Treasury notes.
3) Use the excess returns of Amazon and the stock market index to estimate Amazon's beta. For the 2003 estimate, calculate the beta using the 60 months of data from 1998 to 2002. For the 2020 estimate, calculate the beta using the 60 months of data from 2015 to 2019. Hint: Use the Excel functions VAR.S and COVARIANCE.S to calculate variances and covariances, respectively.
4) Calculate the market risk premium. Use data from 1954 to 2002 for the cost of equity estimate as of January 2, 2003. Use data from 1954 to 2019 for the cost of equity estimate as of January 2, 2020. Calculate the market risk premium as the average annual difference between the returns on the stock market index and the yields of the 10-year Treasuries.
5) Use the current (as of January 2, 2003 and 2020) 10-year Treasury yields together with the betas and market risk premia in the CAPM equation to compute the cost of equity.
6) Be careful to properly distinguish between monthly and annual returns and yields.
7)There are multiple correct ways to perform some of the calculations. So you have some flexibility, and there is more than one correct solution.
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