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
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