How do you calculate cost of equity?
Example Microsoft as of today.
COE = Risk Free Rate + beta * (Expected Market Return - Risk Free Rate)
Risk Free Rate = 4.318% (10 yr treasury yield from Wall Street Journal)
Beta = .89 (CapIq)
Expected Market Return = ?
Can someone help figure out how and where to find/calculate the Expected Market Return?
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CAPM is very simple in most cases, but the formula may trip some people up when first looking at it and not having much background in technical skills yet.
The RFR is always going to be the yield of the 10-year note in most cases.
Your beta is variable for each company obviously which is tracking how x company moves in correlation with the markets return ie. the S&P 500. If the market goes up 1 percent and your company has a beta of 1.3 , your company will go up 1.3 percent.
Expected market return (EMR) is going to be exactly what it says, the expected return on the market in which you are looking at. Most people tend to use 9-10% as this value as the average return of the stock market over the years is anywhere between those two values or even 11%. Expected return whether it be for a given market or for a portfolio of mixed assets will always be in terms of the weighted average return of all entities within the data set.
I hope this helps.
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