Capital Asset Pricing Model Applied to Constant Contact

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Part I. The company that I have chosen is Constant Contact. They trade on NASDAQ and their ticker symbol is CTCT. The company is a marketing firm, and according to Yahoo! Finance they are engaged in "on-demand email marketing, social media marketing, event marketing and online survey products, primarily in the United States." The beta for CTCT is 1.47. This beta indicates that the company is more volatile in its stock performance than the general market. The inclusion of this company in a portfolio will increase the volatility of the portfolio. This means that the potential return will be greater, but so will the potential loss. Part II. For this exercise, it is assumed that the present yield to maturity of US government bonds is 4.5% (it is actually much lower). The market risk premium is assumed to be 6.5%. Using the capital asset pricing model, we can estimate the cost of equity for Constant Contact. The capital asset pricing model is a method of determining the value of a company based on current market characteristics and the historic performance of the company versus the broad market. The capital asset pricing model can be used to calculate the firm's cost of capital, or at least the firm's cost of equity. The cost of equity reflects the firm's cost of using equity capital to finance its operations. The use of CAPM is effective, because the beta is based on market performance of the company's stock. The market is assumed to be capable of making an accurate

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