CAPM Formula

CAPM Formula

Cost of equity can be calculated by the CAPM (Capital Asset Pricing Model).This methods takes into account market risk.

CAPM = Rf + βe (Rm-Rf)

Rf= Risk Free Rate

Rm= Market Rate

βe = Equity Beta

Example

Market Rate= 9%

Bank Rate= 12%

Equity Beta= 1.3

Calculate Cost of equity?

Solution

=  12% + 1.3 ( 12%-9%)

=12%+3.9%

=15.9%