CAPM Calculation

Related BrainMass Solutions

• Expected Return

  Formula and calculation for expected return under CAPM is given in solution.

• Beta and required return calculation

  Beta and required return calculation are provided.

• Discount Rate Explanation

  This cost of common equity is later used in the calculation of the weighted average cost of capital (WACC).

• Cost of Common Equity

  Ke = (3.975/40) + 0.06 = 15.9375% The solution explains the calculation of cost of common equity using the CAPM method and the DCF method

• The Cost of Equity Capital and the CAPM

  This solution contains a step by step calculation for the cost of equity using the CAPM model.

• Required rate of return

  Using CAPM equation rA = rRF + (rM-rRF) beta 12% = 5% + (10%-5%) beta beta = (12%-5%)/(10%-5%) = 1.4 b. Using the CAPM equation with beta = 2 rA = 5% + (10%-5%) 2 rA= 15% The solution explains the calculation of required rate of return

• Cost of Equity

  Hod Inc: Calculation of Cost of equity using the dividend discount formula: Price = Future Dividend/(Cost of equity - Growth Rate) =>12.50 = (1.5*1.02)/(re-.02) => re - .02 = .1224 => re = 14.24% Calculation of Cost of equity using CAPM: Cost

• Portfolio Betas & expected returns

  Using CAPM, Expected return = Rf + (Rm-Rf) beta 14% = Rf + (11.5%-Rf) 1.45 14% = Rf + 16.675% - 1.45Rf Rf = (16.675%-14%)/.45 = 5.94% The solution explains the calculation of beta, expected return, risk free rate using the CAPM equation

• Describe why two methodologies (CAPM and WACC) may produce different results.

  I am going to start with the calculation of WACC (as an example) to show the difference. The firm's WACC is the cost of Capital for the firm's mixture of debt and stock in their capital structure. CAPM is a method to calculate the cost of equity.