Question

What is the cost of firm's equity using the CAPM approach? What estimate should the analyst use?

Answer 1

Using CAPM, Cost of equity = Rf + beta x (Rm - Rf)

where, Rf - Risk Free rate, beta - beta of the stock, Rm - Expected Market Returns

Analyst typically use the treasury yield as a risk free rate. Beta is essentially the correlation of a stock's returns with the market returns for the last few years. Expected Market Returns is estimated by taking the consensus expectation of all market participants, usually available from Bloomberg or any financial data provider.