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Capital Asset Pricing Model (CAPM) (Due November 13)
In this section, you will calculate the firm’s expected rate of return using the capital asset
pricing model. You will first need to calculate your company’s beta and then use that in the
CAPM formula to get the expected rate of return.
Data Required:
• Monthly closing stock prices (in Canadian dollars) for your company for the 4- year
period September 1, 2020 – August 31, 2024.
• A good source is https://ca.finance.yahoo.com/, as it allows you to search and
download the entire period at once.
• You can specify the date range, choose monthly prices, and download the
information.
• Use the Close price rather than the Adjusted Close price.
• Note: Yahoo provides Open-High-Low-Close prices for each month and lists the
date as the first trading date of the month. The closing price is from the last
trading day of the month.
• Monthly closing prices for the S&P-TSX Composite Index for the period September 1,
2020 – August 31, 2024.
• A good source is https://ca.finance.yahoo.com/. The company symbol will be
^GSPTSE. You can also click on S&P/TSX to get to the page.
• Yahoo Finance may be missing some of the data when you download monthly
prices. You will need to look at the daily prices to fill in the missing values.
• The yield on a 3-month Canada Treasury Bill for August 30, 2024.
• You will find this at www.bankofcanada.ca.
• From the dropdown menu under “Statistics”, choose “Interest Rates”, then
choose “Treasury Bill Yields”. Click on “Look up the past ten years of data” for
these series. Select your date and choose Treasury Bills, 3-Month, Daily. You will
be given the yield as a percentage.
Calculations:
• Calculate each of the monthly returns for your stock over the 4 years from
September 2020 to August 2024 (i.e., percentage change in price from month end to
month end).
• Calculate each of the monthly returns for the S&P/TSX Composite Index over the
same 4-year period.
FIN*2000 Fall 20246
• Create a scatter plot using Excel that shows the return on your company’s stock and
the return on the market index. Each point will represent one month (see Figure
12.2 in your text). Plot the characteristic line on the graph (the trendline). Make
sure to label the axes.
• Calculate the standard deviation of company returns, the standard deviation of
S&P/TSX returns, and the correlation coefficient of S&P/TSX and company returns.
• Calculate beta as the slope of the characteristic line on your graph (see a sample
spreadsheet in section 12.1 of your text).
• Using the value of beta that you calculated, the yield on a three-month treasury bill
for the risk-free rate, and 6 percent as the market risk premium (the average market
risk premium for Canada in 2023), calculate the expected rate of return based on the
capital asset pricing model.
Report the data and results for these two sets of calculations on the CAPM Template. Make
sure you include sources for your data and show the formulas you used (using variable names)
as well as the calculations (using your numbers – note for the return calculation you only need
to show one sample calculation). You should show the excel formulas that you used for
standard deviation, correlation, and beta. Include a graph of your data and make sure you label
the axes. You will have to convert your document to Portable Document Format (PDF) before
you submit it to PEAR (submitting a screenshot is not acceptable). This ensures that everyone
will be able to access and read it. Make sure you check your file after the conversion – the
conversion has the same effect as printing the document and the results are not always what
you expect. You may find that you need to go back and adjust your formatting. Make sure you
check the formatting before you submit to PEAR. It is your responsibility to make sure that you
have properly uploaded the correct file to PEAR. If you are having technical difficulties, you will
need to contact CourseLink support.
Weighted Average Cost of Capital (WACC) (Due November 13)
In this section, you will calculate a return on debt for your firm and use that with the expected
returns on equity that you calculated in the DDM and CAPM parts above to calculate a
weighted average cost of capital. You will get three different values, one for each method you
used to calculate the cost of equity.
Data Required:
• Most recently available annual financial statement information: Long-Term Debt and
Number of Shares Outstanding.
• These can be found at https://ca.finance.yahoo.com/,
http://www.tmxmoney.com/en/index.html, www.sedar.com, or on the
company’s website.
• Your company’s debt rating for Senior Debt.
• Sometimes this will be listed on the company’s website. Some other sites to check
are moodys.com, fitchratings.com or standardandpoors.com. These sites may
require registration, but, at least at the moment, they are free. A google search
may also turn up the debt rating.
FIN*2000 Fall 20247
• The yield on a 10-year Government of Canada bond for August 30, 2024.
• You will find this at www.bankofcanada.ca
• The closing stock price for your company on the date of the annual report.
Calculations:
• Estimate the return on the firm’s debt by the following method:
• Find the appropriate yield spread given the firm’s debt rating (i.e., the extra yield
over the equivalent term government bond) from
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm
• Add the appropriate spread for your company’s debt rating to the August 30, 2024
yield on 10-year Government of Canada bonds. If you cannot find a debt rating for
you company, you can assume, you can assume that it has a BBB rating.
• Calculate the values of debt, equity and the firm.
• Use the value of long-term debt from the most recent statement of financial
position for the value of debt.
• Calculate the value of the equity using the number of shares outstanding and the
actual price from the date of the most recent annual report.
• The value of the firm will be the sum of the debt and equity (ignore any preferred
stock).
• Also calculate the proportions of debt and equity to make it easier to check your
WACC calculations.
• Calculate the weighted average cost of capital (WACC) for your firm three ways.
• Once using the expected return on equity from the constant-growth dividend
discount model – historical growth,
• Once using the expected return on equity from the constant-growth dividend
discount model – sustainable growth, and
• Once using the expected return on equity from the capital asset pricing model
(CAPM).
• Use the book value of debt and the market value of equity and assume your
company has a 26 percent corporate tax rate.
Report the data and results for these two sets of calculations on the WACC Template. Make
sure you include sources for your data and show the formulas you used (using variable names)
as well as the calculations (using your numbers). Also make sure that you report the values for
expected rate of return on equity that you determined from the previous parts of this project.
You will have to convert your document to Portable Document Format (PDF) before you submit
it to PEAR (a screenshot is not acceptable). This ensures that everyone will be able to access
and read it. Make sure you check your file after the conversion – the conversion has the same
effect as printing the document and the results are not always what you expect. You may find
that you need to go back and adjust your formatting. Make sure you check the formatting
before you submit to PEAR. It is your responsibility to make sure that you have properly
uploaded the correct file to PEAR. If you are having technical difficulties, you will need to
contact CourseLink support.
FIN*2000 Fall 20248
Summary Memo (Due November 13)
Write a one-page (at most) memo to your boss reporting your findings.
• Include an opening segment that states the problem and the purpose of the memo
(your boss receives lots of memos and needs to know what this one is about). Make
sure you state the name of the company you have analyzed and its industry.
• Make sure to state that your colleagues will be determining the cash flows.
• Provide the three rates of return that you calculated for your company.
• Provide the three weighted average costs of capital that you calculated.
• Provide a recommendation for what discount rate your company should use in
evaluating its proposed investment.
• Provide a brief explanation of why you are recommending that rate.
There is no correct answer to what you should recommend for a discount rate. You should,
however, provide a good explanation for why you are recommending the rate you have chosen.
You should not attempt to use AI to write your memo as the memo will likely be of poor quality.
If you use AI, you are not submitting your own work and so you will be charged with academic
misconduct.
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