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Capital Asset Pricing Process Analysis

explanatory Essay
825 words
825 words
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There are a lot of items that go into buying and investing in a company. One of the hardest decisions for a shareholder is deciding if the investment is going to be profitable. Once a shareholder decides to buy or invest in an organization the next step would be deciding how much to pay or invest. Another hard decision is if the investment that was made goes bad can you get out of this obligation. Throughout the course of the paper I will illustrate some of the items that assist with this decision process. The items that are covered in this paper are the cost of equity, the cost of debt, and the weighted average cost of capital. All three of these items assist in the decision process. Most companies use Capital Asset Pricing Model (CAPM), which is a model that is utilized to calculate the required rate of return. The main reason for utilizing this model is that the rate of return injuctively authorized by equity investors will be a function of the jeopardy of the equity where risk is quantified by a variable beta (McGladrey & Pullen, 2010). The equation used to deduce the Cost of Equity (CoE) = Risk-Free Rate of Return + (the market risk premium – Risk-Free Rate of Return) x beta coefficient (unsystematic risk) (Investopia, 2016). Re = Rf + β (Rm - Rf) Rf = 2.32% β = 0.95 Rm = 13.96% Re = 2.32% + 0.95 (11.72% - …show more content…

In this essay, the author

  • Explains how the cost of equity, debt, and weighted average costs of capital assist in the decision process.
  • Explains that most companies use capital asset pricing model (capm), which is a model that is utilized to calculate the required rate of return.
  • Explains that amazon.com inc's interest expense (positive number) was $459 mil and its total book value of debt (d) is $13336 mil.
  • Explains that the weighted average cost of capital (wacc) is the rate that a company is expected to pay to all its security holders to finance its assets.
  • Explains the cost of debt finance, wdebt 6.96%, and the income tax rate, t 36.0.
  • Explains the importance and value of weighted average cost of capital (wacc) as a financial tool for companies and investors.

One of the key rates used to figure out the CoD is the current market rate Amazon (AMZN) is paying on its debt. If AMZN is not paying market rates then one should be estimated (Investopedia, 2016). Because companies like AMZN profit from tax deductions obtainable on interest paid, the net CoD is the interest paid minus tax savings resulting from the tax-deductible interest payment (Investopedia, 2016). As of Dec. 2015, Amazon.com Inc 's interest expense (positive number) was $459 Mil. Its total Book Value of Debt (D) is $13336 Mil (GuruFocus,

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