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# Beta and Cost of Equity Capital

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Calculate the beta and the cost of equity capital. The following historical data for a proxy firm is similar to the firm evaluated in the final project assignment.

Year Market Rate of Return Firm Rate of Return
20X0 25% 15%
20X1 10% 6%
20X2 15% 9%
20X3 20% 12%

Using the above data calculate the beta of the firm.
If the risk-free rate is 4%, and the market rate of return is 14%, calculate the required rate of return (cost of equity) for the stock using CAPM.

#### Solution Preview

calculate the beta and the cost of equity capital. The following historical data for a proxy firm is similar to the firm evaluated in the final project assignment.

Year     Market Rate of Return       Firm Rate of Return
20X0            25%                          15%
20X1            10%                           6%
20X2            15%                           9%
20X3            20%                          12%

Using the above data calculate the beta of the firm.
If the risk-free ...

#### Solution Summary

Calculates Beta and Cost of Equity Capital.

\$2.19

## Calculate beta and cost of equity capital for a company

Last week the price of a company's common stock closed at \$27.00 per share. Use the weekly stock price and index value data in the table below to compute the company's beta, then use the beta to estimate the company's required cost of equity. Assume the appropriate risk-free rate is 5.5% and the market risk premium is 6.5%.

Beta = ________ Company's Cost of Equity Capital = _______ %

First day of the month Closing Prices for the company and Market Index
April 2009 through October 2009

Date Company S&P500
10/9/09 27.000 1096.56
10/2/09 26.500 1071.49
9/25/09 26.100 1025.21
9/18/09 25.500 1044.38
9/11/09 25.250 1068.30
9/4/09 24.500 1042.73
8/28/09 24.650 1016.40
8/21/09 25.375 1028.93
8/14/09 25.750 1026.13
8/7/09 25.250 1004.02
7/31/09 25.250 1010.48
7/24/09 24.000 987.48
7/17/09 24.850 979.26
7/10/09 23.400 940.38
7/3/09 22.750 879.13
6/26/09 23.700 896.42
6/19/09 25.250 918.90
6/12/09 25.500 921.23
6/5/09 26.000 946.21
5/29/09 26.600 940.09
5/22/09 24.750 919.14
5/15/09 24.750 887.00
5/8/09 24.250 882.88
5/1/09 24.500 929.23
4/24/09 23.500 877.52

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