Estimating the Cost of Capital
- Find a firm of your interest. Make sure it has recent stock price/return information
- For the period of Jan 1st 2011 to Dec 31st 2020, get monthly return (including dividends) of the stock. (2’)
- For the same period of time, get corresponding monthly return for S&P500 (1’)
- For the same period of time, get corresponding 4-weeks (1-month) treasury bill rate (1’).
- Run CAPM regression.
Note: you can use Excel to run the regression.
- estimated intercept, estimated slope (beta) (2’)
- Calculate Jensen’s alpha (1’)
- Assess Cost of Equity (2’), please look up the current monthly risk-free rate (September 2021) and let’s assume the current expected market risk premium is 3.50%.
- Assuming the cost of debt of your company is 10%, and debt ratio is 40%, tax rate is 30%, what is the cost of the capital? (1’)