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Cost of Equity

For this exercise, you are asked to calculate the CAPM cost of equity as of the end of 2016. The subject firm has a beta of 1.46, which is stored in beta. You will have to calculate the risk-free rate and equity risk premium based on the techniques you learned in the earlier chapters. The raw data for 10-Year US Treasuries from the Federal Reserve Electronic Database are stored in treas and the data from Professor Damodaran's website for the returns of the S&P 500 Index and 10-Year Treasury bond are stored in damodaran.

This exercise is part of the course

Equity Valuation in R

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Exercise instructions

  • Subset the US Treasury data to December 30, 2016.
  • Keep the 2nd column (yield).
  • Convert the risk-free rate from percentage terms to decimal terms.
  • Calculate the annual difference between the S&P returns and US Treasury Bond returns.
  • Calculate the average of the difference in returns.
  • Calculate the CAPM Cost of Equity.

Hands-on interactive exercise

Have a go at this exercise by completing this sample code.

# Subset Treasury data to 12/30/16
rf <- subset(treas, ___)

# Keep 2nd column
rf_yield <- ___

# Convert to decimal terms
rf_yield_dec <- ___
rf_yield_dec

# Calcualte difference between S&P 500 Return and Treasury Return
diff <- ___

# Calculate average difference
erp <- ___
erp

# Calculate CAPM Cost of Equity
ke <- ___
ke
Edit and Run Code