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Exercise

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.

Instructions

100 XP
  • 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.