|Exercise 15.1||Cost of Equity: Capital-Asset Pricing Model Approach|
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
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
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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