cost of capital minicase|Course hero helper

Posted: February 19th, 2023

There are five questions you need to answer. They require you to search for market data and research some aspects (such as, finding the historical market risk premium from the textbook when estimating the cost of equity, etc). Be sure you answer all five questions. You may use excel for your calculations (recommended) or you may calculate by hand – either way, your calculations should be included in your write up.

 

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SOLUTION

The historical market risk premium refers to the excess return that investors expect to receive over and above the risk-free rate of return for investing in the stock market. It is calculated as the difference between the average annual return on the stock market and the risk-free rate of return over a certain period of time.

The historical market risk premium can be calculated using different sources of data, such as the S&P 500, the Dow Jones Industrial Average, or other stock market indices. The historical period used to calculate the market risk premium can vary, but a common period is the last 50 years.

According to the 2021 edition of the “Stocks, Bonds, Bills, and Inflation (SBBI)” yearbook by Morningstar, the historical market risk premium for the period of 1926-2020 in the United States

 

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