• 6. Estimating the Cost of Capital

    Now that we have the necessarily theoretical framework, this module focuses on the practical estimation of expected returns using the CAPM. To this end, we first discuss how to estimate the key ingredients of the CAPM, the risk-free rate, the market risk premium, and the "beta" of the asset in question. Then we discuss the necessary additional steps to obtain the firm's overall expected return, both before and after taxes. The latter is also known as the Weighted Average Cost of Capital (WACC) and constitutes the most important discount rate in firm and project valuation. 

5. The Capital Asset Pricing Model (CAPM)7. Practical Implementation