CAPM - Basically we take the component parts of the cost of...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
According to the CAPM, what should  be the required rate of return on  Aribelle’s Advertising, Inc stock? k j  = 0.0175 + 1.79*(0.0775 -  0.0175) k j  = 0.0175 + 1.79*(0.06)  k = 0.0175 + 0.1074  k = 0.1249 =  12.49% According to the CAPM, Aribelle’s  Advertising stock should be priced  to give a  12.49%  return. The Build Up Method This is an  ad hoc  method of  estimating the cost of capital for  poorly diversified investors . The build up method is much more  commonly used for small   businesses
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: . Basically, we take the component parts of the cost of equity and combine them with addition. Component Costs:-Bond Yield-Equity Risk Premium-Micro-Cap Risk Premium-Liquidity (i.e. Start-Up) Risk Premium Suppose the Treasury bond rate is 2.25% , the equity risk premium is 5.75% , the micro-cap premium rate is 2.75% , and the start-up risk premium is 3.25% . Using the Build-up Method, what is the required rate of return on this equity?...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern