Question

1. The Excel file Stock Data contains monthly data for several stocks and the S&P 500 Index (i.e., the market). Assume the risk free rate of return is 2.5%.
   1. Compute the cost of equity (required rate of return) for Cin using the classic CAPM.
   2. Compute the Weighted Average Cost of Capital (WACC) for Cin using the classic CAPM if the corporate tax rate is 20%, the cost of debt is 15% and the capital structure is: 75% equity and 25% debt.

Cin
-2.90%
4.79%
2.91%
4.25%
5.30%
-0.88%
3.54%
3.76%
2.94%
2.86%
-0.86%
0.41%
-2.85%
-3.05%
4.85%
1.26%
5.82%
-7.20%
-0.86%
5.10%
1.69%
-0.83%
0.86%
4.66%
4.45%
0.34%
0.00%
1.18%
6.25%
0.37%
5.95%
0.00%
6.43%
7.72%
-6.22%
0.34%
-2.69%
3.45%
-6.46%
0.00%
8.77%
0.34%
3.39%
-1.30%
-1.69%
2.58%
3.20%
3.47%
2.91%
4.25%
5.30%
0.41%
-2.85%
-3.05%
4.45%
0.34%
0.00%
-2.69%
-1.69%
3.45%

S&P 500
2.40%
5.20%
4.00%
-0.50%
9.00%
1.90%
-0.40%
-2.30%
2.10%
2.40%
-6.70%
1.30%
2.60%
-2.50%
9.80%
-0.70%
-0.30%
-9.00%
-4.90%
-0.40%
6.40%
2.70%
4.40%
7.20%
2.40%
0.30%
4.30%
-4.60%
4.70%
2.40%
-1.60%
1.30%
-4.00%
11.40%
-1.90%
1.30%
-2.00%
2.90%
0.50%
-1.50%
4.00%
-2.00%
1.20%
0.40%
3.40%
1.30%
0.70%
1.40%
4.00%
-0.50%
9.00%
1.30%
2.60%
-2.50%
2.40%
0.30%
4.30%
-2.00%
3.40%
2.90%

Answer 1

1.Calculation of cost of equity

Mean of the co		Total of returns of the co.	86.27/60=	1.44%
		Total number of samples
Mean of the market		Total of returns of the co.	85.2/60=	1.42%
		Total number of samples
	Variance of a co	=853.5108/60=	14.22518
	Covariance	=24950.81/60-1	422.1128
	Beta is equal to		variance/covariance		14.225/4.22.1128=	0.0337
		CAPM	Rf + (Rm-Rf)Ɓ
		so	.025+(.0142-.025).0337
			0.024636
		Cost of equity is 2.46%

2.

Calculation of WACC
	Weights	After tax	Weighted average
Equity	0.75	0.024	0.018
Debt	0.25	0.03	0.0075
		0.054	0.0255
	WACC=	0.0255