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Technical note
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Reference no. UVA-F-1456
Published by: Darden Business Publishing
Originally published in: 2004
Version: 8 April 2014
Revision date: 17-Apr-2014
Length: 10 pages
Data source: Published sources

Abstract

This note discusses how some of the most financially sophisticated companies and financial advisors estimate the cost of equity capital. It focuses on areas where finance theory is silent or ambiguous and practitioners are left to their own devices. Survey evidence shows that the Capital Asset Pricing Model (CAPM) is the most widely used model. The note discusses methods companies use to estimate the three key elements needed to apply the CAPM: a proxy for the risk-free rate, an estimate of beta, and an equity-market risk premium. The note is useful for students attempting to apply the Capital Asset Pricing Model.

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Abstract

This note discusses how some of the most financially sophisticated companies and financial advisors estimate the cost of equity capital. It focuses on areas where finance theory is silent or ambiguous and practitioners are left to their own devices. Survey evidence shows that the Capital Asset Pricing Model (CAPM) is the most widely used model. The note discusses methods companies use to estimate the three key elements needed to apply the CAPM: a proxy for the risk-free rate, an estimate of beta, and an equity-market risk premium. The note is useful for students attempting to apply the Capital Asset Pricing Model.

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