Question

Can anyone assist me in interpreting this CAPM Model for Ford Motor Co. ?

I'm trying to understand what I should highlight in a discussion of the results and the conclusion that can be drawn from those results.

As per my textbook, the discussion holds 20 marks, while the conclusion is worth 10 marks.

The relevant information is shown below.

tes of Retu 36. Jan 31, 2016 11.94 37. Feb 29, 2016 12.51 33. Mar 31, 2016 13.50 12.4290|1940.24 |-5.07% 4.77% | 1,932.23 |-04190 7.9196 2,059.74 6.606 1.56% | 2,065.30 | 0.27% -0.52% | 2,096 95 | 1.53% 6.826 2.093.86 0.096 1.9196 | 2,173.60 | 3.56% -0.47% 12,170.95 |-0.12% Ford Motor Co., monthly rates of return Ford Motor Co., monthly rates of return 40 31, 2016 13.49 41. Jun 30, 2016 12.57 42. Jul 31, 2016 12.66 31, 2016 12.60 Ford Motor Co. (F) Standard & Poor's 500 Price(F, t Dividend(F,R(F,t) Price(S&P RS&P 500, t) 45.Oct 31,2016 11.74 2.63% | 1,514.68 | 1.11% 4.289 11,569.19 | 3.60% 4.26% | 1,597.57 | 1.81% 15. 109.011.630.74 | 2.08% 1.34% | 1,606.28 |-1.50% 9.76% | 1,685.73 | 4.95% -4.0996 1.63297 |-3.13% 4.20% | 1,681.55 | 2.97% 2.02% 1.756.54 14.46% -0.18% 1,805.81 12.80% 9.66% | 1,848.36 | 2.36% 2.24% 1.782.39 1.3.5696 1.876 2,193.81 3.426 1.4296 | 2,238.83 | 1.82% 2. Mar 31, 2013 13.15 47. Dec 31, 2016 12.13 30, 2013 13.71 4. May 31, 2013 15.63 5. Jun 30, 2013 15.47 6. Jul 31, 201316.83 49. Feb 28, 2017 12.53 50. Mar 31, 201711.64 30, 2017 11.47 7.1090 |2,362.72 -0.17% 12.384.20 |-0.04% | 0.9196 9. 9. Oct 31, 2013 17.11 10. Nov 30, 2013 17.0S 1 Dec 31, 2013 1543 12. Jan 31, 2014 14.96 13. Feb 28, 201415.39 14. Mar 31, 2014 15.60 53 Jun 30, 2017 11.19 54. Jul 31, 2017 11.22 0.63% | 2,423 41 1.6196 12470.30 1.69%|2471.65 | 0 48% | 1.93% | 0.05% 1.93% | 2.2296 | 2 81% 30, 2017 11.97 57. Oct 31, 2017 12.27 3.7696 2.04% | 2.57526 | 2647 58 1.36% 1.872.34 10.69% 4.33% 1.883.95 10.62% 1.30% | 1,923.57 | 2.10% 4.37% 11.950.23 11.91% -0.5596 |1930.67 |-1.51% 2.29% 2.003.37 13.77% 15.05% 1.972.29 3.89% 12,018.05 | 2.32% 11.64%| 2,067.56 | 2.45% 1.46% 2,038.90 1.0.4296 -4.13% | 1,994.99 |-3.10% 11.08% 2.104.50 15.49% 1.22% 12,067.89 |-1.74% 1.18%|2085.51 | 0.85% 3.99% 2.107.39 11.05% 1.05% 12,063.11 |-2.10% -0.20% 2.103.84 11.97% -6.4796 1.972.18 | -6.26% -2.16% | 1,920.03 |-2.64% 10.24% 2.079.36 18.30% 3.24% 2,080.41 10.05% 1.67% 2.043.94 1.1.7596 59. Dec 31, 2017 12.49 Av Standard Deviation 30, 201416.15 0.45% 16. May 31, 2014 16.44 2.71% 18. Jul 31,201417.02 19 20 21. Oct 31, 2014 14.09 22. Nov 30, 2014 15.73 23. Dec 31, 2014 13.30 (1) Data in USD $ per share of common stock, adjusted for splits and stock dividends. (2) Rate ofreturn on common stock ofF during period t (3) Rate of return on S&P 500 (the market portfolio proxy) during period t 30, 201414.79 1.556 Jan 31. 201514.71 25. Feb 23, 201516.34 26. Mar 31, 2015 16.14 28. May 31, 2015 1.17 29. Jun 30, 2015 15.01 30. Ju1 31, 2015 14.83 31. Aug 31,2015 13.87 32 33. Oct 31, 2015 14.81 0.151 35. Dec 31, 2015 14.09

Answer 1

CAPM( Capital Asset Pricing model)

Discussion

It is used to calculate cost of equity which will be further use in the calculation of WACC(Weighted Average Cost Of Capital), the formula for CAPM is given below

E(RF)= RF+ B(ERP)

RF= It stand for Risk free Rate

B= Beta

ERP = Equity Risk Premium

Risk free rate is the return which will have no risk or deviation attach to it eg Govt Bond rate

Beta show how the stock will move with the movement of the Underlying Index i.e if stock beta is 1.31 which means that if S&P(Underlying index in this example) will go up by 1% then stock will move up by 1.31% and visa versa

ERP its formula is Expected return of market - Risk free rate for example S&P is expected to grow by 12.43% and risk free rate is 2.97% so the ERP will be (12.43-2.97)= 9.46%

Now lets put all the variable in the formula.

Cost of Equity = RF+B(ERP)

Cost of Equity =2.97+1.31*(9.33)

Cost of Equity= 15.36%

It means that is the company capital structure is of 100% equity then its cost of equity or discount rate will be 15.36% company will use this discount rate to find Present value of Future cash flow.

For example company have under taken a project which have a cash flow as following

Period	Cash flow
0	-1000000
1	500000
2	600000
3	500000
4	700000

Here we will compute NPV with the help of above Cost of Equity i.e. 15.36%

NPV= 605229

Excel formula ( =npv(15.36%,500000,600000,500000,700000)+(-1000000)

The thumb rule here is if the Net Present Value(NPV) is positive with the discount rate we will undertake the project.

So here we have seen that how to calculate Cost of Equity using CAPM what those variable and number means and how we can use that in project Evaluation