Sunday, January 2, 2011

Estimating the Required Rate of Return

So in Corp Fin we went through the use of CAPM to get an idea of the hurdle rate.

Anybody found any useful resources that could guide us to an appropriate CAPM for the industry and countries we are dealing with.

Sites like Digital Look and Yahoo Finance can give an indicator for beta but we need to plug it in somewhere?
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2 comments:

  1. DavidMJanuary 3, 2011 at 9:40 PM

    Found some useful resources on the interweb.

    www.digitallook.com
    uk.finance.yahoo.com
    www.ftse.com

    One source recommended the risk free rate to be the average Government Bond Yields (10 Year Notes).

    Have taken the gain for the FTSE All Market index.

    For now have limited this to 1 year (2010) as the market lost ~29% in 2008. Any ideas on how we should treat the massive dip in 2008 to try and get a good proxy for the Market Rate?

    As it stands:
    Risk Free Rate = 6.32%
    Market Rate = 10.94%
    Beta for KIE (from Yahoo Finance) = 0.65

    Plugging in to CAPM we get a required return on equity of 9.32%

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  2. MartinJanuary 4, 2011 at 2:43 PM

    Hi

    My advice is not to worry too much about cost of capital at this stage - better to focus on coming to grips with your firm's activities, strategy and its key accounting drivers and economic and business drivers.

    Also keep reflecting on the risk of your firm's operations - risk comes from what a firm does, not frim the captial markets ...

    Martin

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