Explain why the CAPM is a practical way to estimate the cost of capital of equity...

Question

Question

Explain why the CAPM is a practical way to estimate the cost of capital of equity and debt capital?

Answer 1

Similar Homework Help Questions

In applying the CAPM to estimate the cost of equity capital, which of the following elements...

In applying the CAPM to estimate the cost of equity capital, which of the following elements is not subject to dispute? a) the market risk premium b)the stock's beta coefficient c) the risk-free rate d) all of the above are subject to dispute The answer is D, but i'm searching for a detailed explaination on why its correct.
Pierce uses the CAPM to estimate its cost of common equity, rs and at the time...

Pierce uses the CAPM to estimate its cost of common equity, rs and at the time of the analaysis the risk-free rate is 5%, the market risk premium is 6%, and the company's tax rate is 35%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 0.8. Based on this information, what is the firm's optimal capital structure, and what would be the weighted average cost of capital at the optimal capital...
If the CAPM is used to estimate the cost of equity capital, the expected excess market...

If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the: A. difference between the return on the market and the risk-free rate. B. beta times the market risk premium. C. market rate of return. D. beta times the risk-free rate. E. return on the stock minus the risk-free rate.

Estimate both the cost of debt and the cost of equity. Explain how to estimate the...

Estimate both the cost of debt and the cost of equity. Explain how to estimate the Corporate Cost of Capital and provide the formula used for CCC.
Figuring out Cost of Equity for Ford CO This weekly puzzle asks you to estimate the...

Figuring out Cost of Equity for Ford CO This weekly puzzle asks you to estimate the Cost of Equity for Ford Motor Co (ticker: F) look at how the way that you calculate it can affect your estimate of value. The questions below: Estimating the Cost of Equity (using CAPM) Reference Formula: Cost of Equity = Risk Free Rate + (β x Equity Risk Premium) [Note: we refer to β as ‘beta’) This weekly puzzle asks you to estimate the...
What are the two primary sources of equity capital? Explain why there is a cost to...

What are the two primary sources of equity capital? Explain why there is a cost to using reinvested (retained) earnings; that is, why aren’t reinvested earnings a free source of capital?

1.What is (WACC), why is it used? 2. Why the weighted average cost of capital (WACC)...

1.What is (WACC), why is it used? 2. Why the weighted average cost of capital (WACC) is used in capital budgeting? 3. Estimating the costs of different capital components—debt, preferred stock, retained earnings, and common stock? 4. How to combine the different component costs to determine the firm’s WACC? 5. Cost of Equity: CAPM, what is it used for?
you need to estimate the equity cost of capital for XYZ Corp. You have the following...

you need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns. What was XYZ's average historical return? Complete the market's and XYZ's excess returns for each year. Estimate XYZ's beta. Estimate XYZ's historical alpha. Suppose the current risk free rate is 4% and you expect the market return to be 7%. Use CAPM to estimate an expected return for XYZ Corp stock. Would you base your estimate of XYZ's equity...
5. Capital Asset Pricing Model (CAPM) a. Explain why it is important to assume that investor's...

5. Capital Asset Pricing Model (CAPM) a. Explain why it is important to assume that investor's already hold the value-weighted "market", or tangency, portfolio in order to apply the Capital Asset Pricing Model (CAPM). b. Does the risk-free asset need to exist in order for us to derive the CAPM? If not, how do investors achieve 2-fund separation? (Hint: Your textbook can help with this.)

Using the CAPM model estimate the cost of equity if the risk free rate is 2.4%,...

Using the CAPM model estimate the cost of equity if the risk free rate is 2.4%, the market is currently returning 9.90% and the stock's riskiness has been estimated at 2.10. [Round your final answer to two decimal places, i.e. if your answer is 0.12345, input 12.35 (without the percent sign)] Answer: 23.19 X (18.15)