CHAPTER 6
Beta Estimation and the Cost of Equity
LEARNING OBJECTIVES
- Estimate beta by the direct method.
- Calculate beta using market model and CAPM.
- Examine the difference between betas of individual firms and the industry beta.
- Show with example instability of beta.
- Explain the determinants of beta.
- Determine cost of equity using beta.
INTRODUCTION
In the earlier chapters, we have discussed two very important concepts: the net present value (NPV) and the return-risk trade-off. NPV of an investment is the discounted value of its future cash flows. The CAPM risk-return framework provides us with a method of determining the discount rate of an investment. In Chapter 5, we have discussed how SML can be used to determine the required ...
Get Financial Management, 12th Edition by Pearson now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
