Capital Asset Pricing

Cost of Equity Capital = Risk free investment rate + (Market premium for risk x Beta).

Capital asset pricing calculates a firm's cost of equity capital from the equation above:

The risk free rate of return = rate available on Government bonds.

The market premium is the additional return available from the stock market over time compared with Government bonds.

The returns from the market should be computed when the market is neither abnormally high nor low.

If the risk free rate = 5.55%.
The return from the market = 10.55%
The risk premium = 5.00%.
Beta = 1.69

The firm's cost of equity = 5.55% + (5.00% x 1.69) = 14.00%.

Software Links

Investment-Calc For Excel

Reference Pages

WACC