# Toyota Cost of Capital

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Toyota Cost of Capital
Toyota Cost of Capital Case:

General Methodology
We used the following framework to do the calculations for all the companies. Afterwards we will discuss their implications:

To estimate the cost of equity (RE) we used the following CAPM model:
RE = RF + βE (RM-RF) whereby, Market Premium = RM – RF = 6% (Given in case)
RM = Return for S & P 500 (a market return that takes into account systematic risk associated with the market place where our company is traded, NYSE)
Risk Free Rate of Return = RF = US Treasury Yield (according to the time horizon we took the Yield Curve for US Treasury. This is the closest to a Risk Free Security since it is backed by the US Government and is perceived as so by the marketplace)
RE = Return for the company in question we wish to analyze βE = COV(RM ,RE)/VAR(RM)

To estimate the Cost of Capital (RA) we use a CAPM similar to RE but we use the beta of capital defined as: βA=(Debt/Assets)*βD+(Equity/Assets)*βE This gives us the following model for the Cost of Capital (RA), similar to the model above:
RA= RF + βA(RM-RF)

All the information was collected from finance.yahoo.com, except for the US Treasury yields which are listed above. We obtained stock quotes for the past 521 weeks to get 520 weekly returns (10 years) and used the pertinent intervals for the respective time horizons. For the Balance Sheets we used the information available on finance.yahoo.com; we utilized the most recent balance sheets for the 1 year horizon, 2007 balance sheets for 3 years, and so on. We did not find any other reliable source for ten year financial statements so we decided to assume that the Balance Sheet will remain the same in the past. We preferred to do this than to use information which could be incorrect or unreliable.

1. Estimate Cost of Equity (RE) and Cost of Capital (RA) for Toyota for 1, 3, 5 and 10 year window? Which horizon do you prefer?

Time Horizon (yrs) | 1 | 3 | 5 | 10 | SnP500 Var |

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