How to Calculate Cost of Equity using CAPM

Рет қаралды 121,861

5 жыл бұрын

This video shows how to calculate a company's cost of equity by using the Capital Asset Pricing Model (CAPM).
You can calculate the cost of equity for a company by using the following formula:
Cost of Equity = Risk-free Rate + Beta * (Expected Market Return - Risk-free Rate)
For example, let's say the risk-free rate is 2% and the expected market return is 10%. If a company's beta is 2.5, its cost of equity would be 22%. This cost of equity is the required rate of return that investors would expect to receive based on the company's systematic risk. If the systematic risk were higher (for example, a company with a beta of 3.0), then the cost of equity would be higher (26%) because investors would expect a higher return to compensate for bearing a higher level of systematic risk.-
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Пікірлер: 37

@damionfisher5663 4 жыл бұрын

Your videos are amazing, lots of simplicity and clarity. Thank You

@treyjasso 2 жыл бұрын

thank you for this video! I needed this one.

@eversongava4708 3 ай бұрын

Thanks for the explanation!

@joh00876 Жыл бұрын

luv your videos. helped me tons -from Korea

@ivornworrell 5 жыл бұрын

*Thank you very much for your financial videos Sir, this is advanced and very useful financial knowledge for business students like myself.*

@Edspira 5 жыл бұрын

Happy to help!

@bto5881 3 жыл бұрын

Thank you, Sir !

@harmankardon478 2 жыл бұрын

Great stuff!

@orianateyorbeard 2 жыл бұрын

This helped with a homework problem of mine! thank you!!-Oreo

@siyabonganxumalo4574 4 жыл бұрын

Wonderful explanation!!!

@amenagh1 4 жыл бұрын

Do you know how to get the risk free rate if it is not given?

@Aaron-wh7jp Жыл бұрын

That comment about finding the market index of the S&P 500 saved me, thank you so much. God is real

@Youssef-vh9dh 2 жыл бұрын

do we use levered or unlevered beta????

@ralphgaoseb1782 10 ай бұрын

Rf, Bi - those available publicly. The Rm is however not clear, where does one get this number?

@vusasivedlamini3617 2 жыл бұрын

Good day, what if im not given the Market rate. How do i complete the formula

@sushilpokharel4147 2 жыл бұрын

how to find the value of beta when one company acquire another company?

@SoulessZombieHD Жыл бұрын

Thank you Sir, that really helped me pass my midterm.

@ExploreLearnEnglishWithGeorge 4 жыл бұрын

I assigned for a Business management course to learn how to run a business...unfortunately this is part of the curriculum and 'me no happy'...I really can't stand this abstract non-sense. Well explained tho, thanks for the vid...by the time we got to Price to Earnings ratio I have already forgotten what is 'Cost of Equity' derived from, and this video was a convenient reminder. Cheers

@Nick_88888 2 жыл бұрын

The question is, how do you calculate beta, or from where do you get it?

@zappas54 2 жыл бұрын

Beta of security= Standard deviation (security return) x Correlation (security return; market return) / Standard deviation (market return). Another formula: Beta: Covariance (security return; market return) / Variance (market return). Using Excel: formula is =SLOPE, where known_y value is individual companies return and known_x value is index returns

@amenagh1 4 жыл бұрын

But what if you do not have the risk free rate. I'm trying to figure out how to get the risk free rate to use.

@derektorresdrums799 4 жыл бұрын

You solve for it if you're given R(i). If not the risk free rate is the T-bill rate

@ExploreLearnEnglishWithGeorge 4 жыл бұрын

treasury bills or short term government bods give you the 'risk free rate' to use for this "fun" excercise

@ivornevin4687 2 жыл бұрын

How was the figure obtained for expected return for market portfolio obtained?

@kayedal-haddad 2 жыл бұрын

Where do you get the risk free rate of return from?

@nitinramesh9027 Жыл бұрын

Its usually the coupon rate of a 10 year treasury bond

@shahbazahmed8996 3 жыл бұрын

love from india

@Edspira 3 жыл бұрын

Thank you!

@richardsalley9848 3 жыл бұрын

The only thing you left out here is was what the "risk free rate" is. According to Investopedia, if the stock is paying an annual dividend of 3%, that is the risk free rate being used - (the dividend percent rate). Or should it be the current rate paid on a treasury bond?

@miked2662 2 жыл бұрын

Personally speaking, I was taught that you use the current rate of a treasury bond as your Risk Free Rate.