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PART VI: THE COST OF CAPITAL, CAPITAL STRUCTURE, AND DIVIDEND POLICY
Chapter 15: Required Returns and The Cost of Capital
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Exercise 15.1

Cost of Equity: Capital-Asset Pricing Model Approach

The Web sites used in this exercise use Java Applets and Javascript.

Business Finance Online contains calculators related to quantitative aspects of financial management (e.g., time value of money, bond valuation, and CAPM).

You should be able to use the CAPM Calculator to figure out the "required return on equity" for the following situations:

SITUATION

EXPECTED RETURN ON MARKET PORTFOLIO

RISK-FREE RATE

BETA

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1	15%	10%	1.9
2	18	14	0.8
3	15	8	1.2
4	17	11	0.7
5	16	10	1.0

http://www.zenwealth.com/BusinessFinanceOnline/index.htm
http://www.zenwealth.com/BusinessFinanceOnline/RR/CAPMCalculator.html

Q. Using the "required rate of return" on a company's common stock as our estimate of a company's "cost of equity," what cost of equity figures did you get for the five situations described above? What generalizations can you make?

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