– Select a U.S. public company (Make sure to include the company name in the title page)
– Calculate the cost of equity using the CAPM for the firm
– Evaluate the results – how realistic do you believe the result to be?
– Pull the beta from at least 2 sources – discuss why they may be different
This analysis will calculate the Cost of Equity (Ke) for Apple Inc. (AAPL) using the Capital Asset Pricing Model (CAPM).
Data Acquisition:
Beta Acquisition and Analysis:
Source 1: Yahoo Finance
Source 2: https://www.marketwatch.com/investing/stock/beta?countrycode=hr
Reasons for Beta Differences:
There can be several reasons for the slight difference in Beta between these two sources:
CAPM Calculation:
Ke = Rf + β (Rm – Rf)
Scenario 1: Using Beta from Yahoo Finance (1.12)
Scenario 2: Using Beta from MarketWatch (1.05)
Evaluation of Results:
The calculated Cost of Equity for Apple using CAPM falls between 8.92% and 9.25%. Given Apple’s large size, market dominance, and relatively stable stock price compared to the overall market, a Cost of Equity in this range seems somewhat reasonable. However, it’s important to consider limitations of CAPM:
Conclusion:
The CAPM calculation provides a starting point for estimating Apple’s Cost of Equity. While the results appear somewhat realistic, it’s crucial to consider the limitations of the model and incorporate other financial analysis techniques for a more comprehensive assessment. Investors should also consider their own risk tolerance and investment goals when making investment decisions.