Market Risk Premium

According to Moyer et al., the appropriate market risk premium to use in the Capital Asset Pricing Model (CAPM) is 8 to 9 percent, relative to 90-day Treasury bill rates, while the appropriate market risk premium is 7 percent, relative to long-term government bond income returns (2019). It is imperative that financial analysts use the correct market risk premium with the corresponding risk-free rate when calculating a company’s cost of equity with the CAPM. In this discussion forum, you will explore the impact of the assumptions and inputs used in the CAPM on a company’s calculated cost of equity.

In your post 

Choose a publicly traded company.

Note: Be sure to choose a company that no other classmate has chosen.

Determine its beta from a published source.

• Hint: Use Yahoo!FinanceLinks to an external site. or NASDAQLinks to an external site. to find the company’s beta.

Find the company’s financial information by putting the company’s name in the search bar.

• Calculate the company’s cost of equity using the CAPM formula and the short-term risk-free rate assumptions.
• Use 8.5 percent as the market risk premium.

Use the current 90-day yield (3-month yield) on U.S. Treasuries as the risk-free rate. Hint: Use the U.S. Department of the Treasury’s Resource CenterLinks to an external site. to look up current 90-day (3-month) Treasury Yield Curve Rates.

• Provide your calculations in a table in your post.

How Do I Insert a Table Using the Rich Content Editor?Links to an external site.

Calculate the company’s cost of equity using the CAPM formula and the long-term risk-free rate assumptions.

Use 7.0 percent as the market risk premium

Use the current 20-year yield on U.S. Treasuries as the risk-free rate. Hint: Use the U.S. Department of the Treasury’s Resource CenterLinks to an external site. to look up current 20-year Treasury Yield Curve Rates.

Provide your calculations in a table in your post.

How Do I Insert a Table Using the Rich Content Editor?Links to an external site.

Compare the two different conclusions of the company’s cost of equity based on your two calculations (based on short-term and long-term risk-free rates).

Hypothesize (rather than calculate) how the different cost of equity estimates would impact the calculation of the weighted average cost of capital for your selected company.

Explain the reasoning of your hypothesis. In your explanation, include a discussion of the company’s beta and the amount of debt the company has currently.

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