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Cost of Equity for Google

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1. Show the work you did to obtain the cost of equity for Google..
2. Is this cost of equity higher or lower than you expected? The average cost of capital for a firm in the S&P 500 is 8.2 percent. Would you think your firm should have a lower or a higher cost of capital than the average firm?
3. Look up the betas for some of the other companies (Yahoo and Microsoft) that you compared to Google . Using these betas, compute the cost of equity for these firms. How do they compare to Google? Are you surprised that some firms have a higher or lower cost of equity than Google?
You can find company beta by using the website http://ca.finance.yahoo.com/. For example, you want to find beta of General Electric Company. Key in company code "GE" and then click on "Key Statistics" (http://ca.finance.yahoo.com/q/ks?s=GE). You will be able to find beta of the company.
4. How would you go about finding the cost of equity using the dividend growth model or the arbitrage pricing theory for Google? You do not have to do any calculations; just explain how you would go about doing these calculations and explain what kind of additional information you might need.

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Solution Summary

This solution will help to find out cost of equity for Google. Also it will help to find out cost of equity using dividend growth model. Attached in Word.

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Answer:
Show the work you did to obtain the cost of equity for Google.

Using CAPM:
Cost of equity for google=Risk free rate of return+(Market rate of return-Risk free rate of return)*Beta
Here,
Risk free rate of return=2.56% (10 year T-bill rate. Source: Yahoo ...

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