The CAPM Approach
by MaestroTo estimate the cost of common stock using the Capital Asset Pricing Model (CAPM)
as discussed in Chapter 3, we proceed as follows:
Step 1. Estimate the risk-free rate, rRF.
Step 2. Estimate the current expected market risk premium, RPM.6
Step 3. Estimate the stock’s beta coefficient, bi, and use it as an index of the stock’s
risk. The i signifies the ith company’s beta.
Step 4. Substitute the preceding values into the CAPM equation to estimate the required
rate of return on the stock in question:
rs rRF (RPM)bi. (6-3)
Equation 6-3 shows that the CAPM estimate of rs begins with the risk-free rate, rRF, to which is added a risk premium set equal to the risk premium on the market, RPM, scaled up or down to reflect the particular stock’s risk as measured by its beta coefficient. The following sections explain how to implement the four-step process.
Taken From : Credit Repair by Attorneys Robin Leonard and Deanne Loonin
Related posts:
- Increase Productivity A rap translation into proper English. The refrain: [Chorus]...
Related posts brought to you by Yet Another Related Posts Plugin.
