Using the CAPM, what is the required rate of return for MSFT?
Return on the market portfolio (SPY) and the risk free rate Rf is given below:
Use Yahoo.Finance MSFT beta estimate: b = 1.044; assume RSPY = 10% (based on 40+ years of historical data); and a risk-free rate of Rf = 4.0% (i.e., based on L-T inflation rate of 3.0% and real return of 1.0%).
Answer: required rate of return for MSFT=10.26%
working notes for the above answer is as under
Kc = Rf + beta x ( Km – Rf )
where
Kc is the risk-adjusted discount rate (also known as the Cost of Capital);
Rf is the rate of a “risk-free” investment, i.e. cash;
Km is the return rate of a market benchmark, like the S&P 500.
We have been provided with the information as follow
Finance MSFT beta estimate:
b = 1.044;
assume RSPY = 10% (based on 40+ years of historical data);
and a risk-free rate of Rf = 4.0%
Now we put this figure in the formulla as follow
Kc = 4% +1.044(0.10 -0.04)
KC=10.26%
