CAPM Cost of Equity
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Please check CAPM calculations for Nike, Sony and McDonalds.
CAPM would calculate Nike's current cost of equity at 2.859%
RE = RF + Beta(RM - RF)
RE = 20% + 0.91(7.50% - 20%)
RE = 2.859%
This calculation is based on a variable market rate of return and a risk free rate. Using a variable market rate of return may be appropriate in comparing companies assuming the market rate is risk-adjusted.
CAPM would calculate Sony's current cost of equity at 2.148%
RE = RF + Beta(RM - RF)
RE = 20% + 1.48(8.50% - 20%)
RE = 2.148%
CAPM would calculate McDonald Corporation current cost of equity at 2.036%
RE = RF + Beta(RM - RF)
RE = 20% + 0.36(9.50% - 20%)
RE = 2.036%
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Solution Summary
This solution shows the calculation of the cost of equity for three companies (Nike, Sony, McDonald's), using Capital Asset Pricing Model (CAPM). The solution also illustrates how to find the values of beta, risk-free rate, and market return using Internet sources.
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Dear Student:
You are using the Capital Asset Pricing Model to calculate the cost of equity of the three companies.
RE = RF + Beta(RM - RF)
Where RE = cost of equity, RF = risk-free rate, RM = market return, and beta = beta value of the company. You are using the correct formula. However, your answers are not correct.
By solving RE using your numbers for Nike RE = 20% + 0.91(7.50% - 20%) = 20% + 0.91(-12.5%) = 20% + (-11.375%) = + 8.625%
Note that my answer is not the same as yours. I could not figure out how you got that answer, but I assume it is either by using the incorrect order of operations or using beta as a ...
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