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Calculate required rate of return on equity using CAPM

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At the end of the year 2004 the Office Equipment Industry had free cash flow to equity (FCFE) of $2.50 per share. The following annual growth rates in FCFE are projected
Year Growth Rate
2005 10%
2006 15%
2007 20%
2008 25%
2009 20%
2010 15%
2011 10%
2012 7%

From year 2013 onward growth in FCFE is expected to remain constant at 5% per year. The industry has a beta of 0.90 and the current industry price is $105. Currently the yield on 10-year Treasury notes is 5% and the equity risk premium is 4%

Calculate the required rate of return on equity according to CAPM.

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This solution provides calculations for the required rate of return on equity according to CAPM.

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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