The CAPM or the Capital Asset Pricing Model is a model that helps in determining a theoretically correct required rate of
The model considers the sensitivity of assets to non-diversifiable risk. It is represented by beta (ß) or the expected return of the market and the expected return of a theoretical risk-free asset.
To calculate the cost of equity from CAPM, the risk-free rate, beta, and market risk premium is required. Beta and market risk premium are difficult to find. Moreover, they are based on certain assumptions. Hence, the calculation of cost of equity under this method is complex.
To determine:
The steps involved in the CAPM and approach to estimate the cost of equity.
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