An Illustration of the CAPM Approach
by MaestroTo illustrate the CAPM approach for NCC, assume that rRF 8%, RPM 6%, and bi 1.1, indicating that NCC is somewhat riskier than average. Therefore, NCC’s cost of equity is 14.6 percent: (6-3a)
It should be noted that although the CAPM approach appears to yield an accurate, precise estimate of rs, it is hard to know the correct estimates of the inputs required to make it operational because (1) it is hard to estimate the beta that investors expect the company to have in the future, and (2) it is difficult to estimate the market risk premium. Despite these difficulties, surveys indicate that CAPM is the preferred choice for the vast majority of companies.
Taken From : Credit Repair by Attorneys Robin Leonard and Deanne Loonin
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