Capital Asset Pricing Model The cost of equity capital, ke, is equated to the required rate of return in market equilibrium. The risk-return relationship is described by the Security Market Line(SML) ke =R=R+(rm-Rt)Bi 15-16
15-16 Capital Asset Pricing Model The cost of equity capital, ke , is equated to the required rate of return in market equilibrium. The risk-return relationship is described by the Security Market Line (SML). ke = Rj = Rf + (Rm - Rf )j
Determination of the Cost of Equity Assume that Basket Wonders(BW has a company beta of 1.25. Research by Julie Miller suggests that the risk-free rate is 4% and the expected return on the market is 11.29 e =R+(rm- roB =4%+(112%-4%)125 k。=4%+9%=13% 15-17
15-17 Assume that Basket Wonders (BW) has a company beta of 1.25. Research by Julie Miller suggests that the risk-free rate is 4% and the expected return on the market is 11.2% ke = Rf + (Rm - Rf )j = 4% + (11.2% - 4%)1.25 ke = 4% + 9% = 13% Determination of the Cost of Equity (CAPM)