Re: WACC - weighted average cost of capital or discount rate
Posted: November 7th, 2018, 12:48 pm
Continuing from my last post, I'm starting to feel more enamoured by the CAPM approach i.e.
Cost of equity = R1 +β {E (R2) – R1}
Where,
E = Expected rate of return on asset,
β = Beta coefficient of assets (being analysed),
R1 = Risk free rate of return
E (R2) = Expected return from market portfolio.
(This value can be calculated by analyzing data of usually five years.)
Though I have heard the term E(R2) i.e. R2 being better stated as the just the average result from the market in which the stock market which the asset under analysis occupies (i.e. FTSE100/250 etc).
What put me off in the past was the silly use of a mysterious term, i.e. β = Beta. If they had *just* called this "volatility index" i.e. V which seems to be what it actually is, then the arrogant sod that I am would have considered this more seriously.
Formula used to calculate beta value is as follow:
β = PIM (SD1) (SDM)/SD2M
Where,
β = Beta of stock
PIM = Correlation coefficient between the returns on stock, I and the returns on market portfolio, M.
SD1 = Standard deviation of returns on assets
SDM = Standard deviation of returns on the market portfolio
SD2M = Variance of market returns
Cost of equity = R1 +β {E (R2) – R1}
Where,
E = Expected rate of return on asset,
β = Beta coefficient of assets (being analysed),
R1 = Risk free rate of return
E (R2) = Expected return from market portfolio.
(This value can be calculated by analyzing data of usually five years.)
Though I have heard the term E(R2) i.e. R2 being better stated as the just the average result from the market in which the stock market which the asset under analysis occupies (i.e. FTSE100/250 etc).
What put me off in the past was the silly use of a mysterious term, i.e. β = Beta. If they had *just* called this "volatility index" i.e. V which seems to be what it actually is, then the arrogant sod that I am would have considered this more seriously.
Formula used to calculate beta value is as follow:
β = PIM (SD1) (SDM)/SD2M
Where,
β = Beta of stock
PIM = Correlation coefficient between the returns on stock, I and the returns on market portfolio, M.
SD1 = Standard deviation of returns on assets
SDM = Standard deviation of returns on the market portfolio
SD2M = Variance of market returns