Course Content
Mastering Discounted Cash Flow Analysis with Excel
Mastering Discounted Cash Flow Analysis with Excel
Cost of Equity Calculation Example
Let's put the CAPM and Build-Up Method side-by-side using a real companyβTeslaβto illustrate how different inputs affect your output.
Recap of the CAPM Formula
Where:
= 4.31% (risk-free rate);
= 2.58 (Tesla's beta);
= 9% (market return).
With these values:
The high beta reflects Tesla's volatility, which significantly amplifies the equity costβsomething investors demand as compensation for risk.
Build-Up Method in Parallel
Let's assume for comparison:
Risk-free rate: 4.31%;
Equity Risk Premium: 5%;
Size Premium: 1%;
Industry Risk Premium: 2%;
Company-Specific Premium: 1.5%.
Even though both methods are valid, they yield different results. The Build-Up Method often produces more conservative estimates for private firms or startups where beta isn't well-defined.
CAPM is dynamic and market-based, suitable for public companies with reliable data;
Build-Up is additive and more controllable, ideal for private or high-uncertainty contexts;
The cost of equity is not a fixed numberβit reflects your assumptions and context.
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