Example 1 · level 1
Risk-free rate 6.5%, expected market return 13.5%, beta of Nair Spices Pvt Ltd 2. Find the cost of equity using CAPM (%).
Show solution
- Rm − Rf = 7%.
- Ke = 6.5 + 2 × 7 = 20.5%.
Answer: 20.5 %
CA INTERMEDIATE: COSTING & FM · COST OF CAPITAL
CAPM: required return on equity
Ke = Rf + β × (Rm − Rf). (Rm − Rf) is the market risk premium.
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Worked examples
Example 2 · level 2
Risk-free rate 7%, expected market return 15%, beta of Sharma Industries Ltd 1.1. Find the cost of equity using CAPM (%).
Show solution
- Rm − Rf = 8%.
- Ke = 7 + 1.1 × 8 = 15.8%.
Answer: 15.8 %
Example 3 · level 3
Risk-free rate 7.5%, market risk premium 7%, beta of Iyer Foods Ltd 0.75. Find the cost of equity using CAPM (%).
Show solution
- Rm − Rf = 7%.
- Ke = 7.5 + 0.75 × 7 = 12.75%.
Answer: 12.75 %