Question
As per the CAPM model, to calculate
cost of equity capital, which of the following information is not required?Solution
The cost of equity capital, using CAPM is calculated as: Cost of Equity = Rf + β*(Rm- Rf) Where, Rf = Risk free rate of return Rm = Market rate of return [if !supportLists]-->· [endif]--> (Rm - Rf ) indicates the risk premium (to get a compensation for additional amount of risks they are undertaking) β = Beta or Market Risk [if !supportLists]-->o [endif]-->CAPM gives compensation for undertaking only the market risks , thus, Risks Premium = β*(Rm- Rf), where,
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