Dr. Glenn Tenney
Risk and return, portfolio diversification and the Capital Asset Pricing Model; The cost of equity
Session Long Project company: Target Corp.
1. Beta of Target= .43
Yield to Maturity (Risk free rate)= 0.19%
Cost of equity of Target= Risk free rate +Beta*Risk premium
2. Beta of Wal-Mart: 0.4
Cost of equity of Wal-Mart= Risk free rate +Beta*Risk premium =.19%+.4*7%
3. Beta of Darden Restaurants Inc.
Cost of equity of Kmart= Risk free rate +Beta*Risk premium
=.0509 % Answer
Even though I have already looked at the other two companies financial summary pages throughout this course and the various assignments I was still surprised to see how close all three relatively were to each other in terms of volatility.
How would you go about finding the cost of equity using the dividend growth model or the arbitrage pricing theory for your SLP company? Cost of equity using dividend growth model
= Estimated dividend of next year/Current Stock price +Growth We will require additional information regarding the:
1) Growth rate of dividends
2) Estimated dividend
3) Stock price
Arbitrage pricing theory
As per this model the cost of equity is governed by two groups of factors: macro factors, and company specific factors. Cost of equity = rf + ?1f1 + ?2f2 + ?3f3 + ???
Where rf is the risk free rate,
Each f is a separate factor and
Each ? is a measure of the relationship between the security price and that factor. Hence information regarding various factors impacting the stock and beta for each of them will be required.
In this module I think the task was interest for me personally to see how close some of the numbers and calculations were especially between two companies in direct competition of each other in their field.