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what is capm used for in finance? 

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Related questions

I have updated this with the appropriate Cost of Debt. Now my I would like to know if my WACC equation is correct?

Data for Hilton Group (HLT)

Equity: Market Cap 18.75 B *found on Yahoo Finance

Debt :

2016 - 10,641,000 *found on Yahoo Finance

2015 – 10,249,00 *found on Yahoo Finance **amount used in WACC calculation due to same number used in Cost of Debt

Annual Report 2015 figures – 9,821,000 *found in annual report – 10K

Risk-Free Rate: .72 *found on Yahoo Finance: Bond Center - 3 month Yield

Market Risk Premium: 5.5% *found in survey – http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2598104 / 7.6 average 1900 - 2004

Dividend Yield: Growth Rate 3.88% *Yahoo Finance, Analysist Estimates – next 5 years

Corporate Tax Rate: 35%

Cost of Equity using CAPM: E(R)= Rf + Beta (Expected Return on Market – Rf) = %

With Survey MRP =0.72+1.35*(5.5-0.72)= 7.173

With Average MRP =0.72+1.35*(7.6-0.72) = 10.08

Cost of Equity using Dividend Discount Model

= 3.88+.35 = 4.23

Cost of Debt:

Weighted Average Interest Rate – 4.2% *found on Hilton.com/quarterly results 2016/fourth quarter 2016 http://ir.hilton.com/~/media/Files/H/Hilton-Worldwide-IR-V3/quarterly-results/2016/q4-2016-earnings-release.pdf

WACC:

5.62% using CAPM cost of equity equation & survey market risk premium (5.5%)

7.43% using CAPM cost of equity equation & average MRP over years (7.6%)

Finance Tutor Please Solved ASAP

Explain the ideas of Systematic, Un-systematic Risk and their relationship with CAPM.

What kind of portfolios will have their expected rates of returns (versus their “beta’s”) located on the Security Market Line?

2. Compute the cost of common equity using the CAPM model. For beta, use the average beta of three selected competitors. You may obtain the betas from Yahoo Finance. Assume the risk free rate to be 3% and the market risk premium to be 4%.

a. What is the cost of common equity?

b. Explain the advantages and disadvantages to use the CAPM model as the method to compute the cost of common equity. Compare and contrast this method with the dividend growth model approach. (

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