Capital Asset Pricing Model Research Paper Example | Topics and Well Written Essays - 1250 words

Capital Asset Pricing Model - Research Paper ExampleThe fair cost of capital in the S&P 500 is 10.2 percent. It can be said that the cost of capital of Nvidia is almost on par with S&P 500 companies. It is pertinent to note that risk free arrange varies time to time depending upon the yield of government Treasury bill. Usually, it is found to give 3% in normal conditions and based on this treasury rate, the cost of truth can also be calculated using the same formulaRj = RF + j RM - RFIt is assumed that difference between the expectation on rate of return for market portfolio and available risk-free rate of return, RM - RF factor is 7.0Then, Rj, the cost of fairness = 3+ 1.54 7 = 13.78Based on this, the cost of capital of Nvidia is certainly higher than average cost of S&P 500 companies.Answer 3.The cost of equity of Chevron (CVX) can be calculated in the similar fashion. Beta of Chevron is 0.70 (Key Statistics 2)The cost of equity = 3+ 0.7 7 (Assuming risk free return of 3%) = 7. 9The cost of equity is unco low in case of Chevron compared to the average cost of S&P 500 companies.It would be further interesting to find the cost of equity whose important is 1.76 Wipro Ltd. (in NASDAQ cognise as WIP)The cost of equity of Wipro = 3 + 1.76 7 (Key Statistics 3) = 15.32Thus, Wipro has higher cost of equity than Nvidia and Nvidias cost of equity is higher than Chevron. With rising beta the cost of equity also goes up. It can be described as a stock valuation model that takes into consideration dividends and their growth, discounted to present value.... in NASDAQ known as WIP) The cost of equity of Wipro = 3 + 1.76 7 (Key Statistics 3) = 15.32 Thus, Wipro has higher cost of equity than Nvidia and Nvidias cost of equity is higher than Chevron. With rising beta the cost of equity also goes up. Answer 4. Dividend Growth Model It can be described as a stock valuation model that takes into consideration dividends and their growth, discounted to present value. chthonic this model, the valuation depends on 1. The Current Dividend 2. The Growth of Dividend at constant rate 3. Required Rate of Return For more clarity, it will be worthwhile to discombobulate some real life situation. The company is paying dividend of $2 per year and it is growing at the constant average rate of 3% per year. The only versatile component in this model is required rate of return, if it is assumed as 15% Then, value under this model can be given as, encourage= Current Dividend / (Required Return - Dividend Growth) (Gordon Growth2011) = 2 / (0.15 0.03) = 2 / 0.12 = 16.66 Above calculation tells that under the given assumptions, this stock at the price of $16.66 should yield average annual 15% rate of return. At this juncture, it will also be prudent to look at the required rate of return and its basis. The required rate or return is given as the risk free return (such as U.S Treasury bill gives) adding to the return required for taking the risk in expend the stock. Thus, required rate (RR) is given as RR = risk free return + ? (RM-RF) = 3+ 1.7 (10-3) Beta for the industry under calculation is 1.70 = 15 That is how required rate of return was assumed as 15% (Dividend Growth) Arbitrage Pricing Theory APT This theory was propounded by Stephen Ross in 1976. This theory has more pliant assumptions to describe as and taken as an alternative to