Cost equity estimates
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Estimate the cost of equity (expressed in percentages or in a decimal format) or the rate of return that Accuray's shareholders 'require'. Use the Capital Asset Pricing Model (CAPM) in order to estimate the rate of return that shareholders require on their investment. Show all calculations.
How would you go about finding the cost of equity using the dividend growth model or the arbitrage pricing theory for Accuray? Explain how you would go about doing these calculations and explain what kind of additional information you might need.
No equations/calculations needed for this part.
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Capital Asset Pricing Model
CAPM compares risk and return and compares them with the overall risk. Following are the assumptions underlying the model:
• Most investors are risk averse and they would like to avoid risk. Those investors who do take risks expect to be rewarded appropriately.
• The CAPM also assumes that there are no transactional costs or taxation
• Assets and securities are divisible into small packets
• Investors are not limited in their borrowing or lending under the risk free rate of return
Concept of Beta
For using CAPM for calculating the required rate of return, it is important to understand the concept of beta. Beta is the overall risk of investing in the market. Beta by definition is equal to one, but it is not necessary that every company would have an ideal beta of one. A company's beta is the ...
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