¶ … label slp 3 in section Session Long Project 'll estimate cost equity rate return company's shareholders 'require'. This important piece information top manager estimate important input effort determine action company add shareholders.
SLP 1 OPM 500
Wal-Mart is one of the greatest American companies and it has been received with both praises as well as criticism. The current endeavor nevertheless is more focused on the financial aspect of the organization, namely the cost of its equity. At a general level, the cost of equity is understood as "the return that stockholders require for a company" (Investopedia, 2011). In other words, it is the amount of money that the organization has to pay in order to reward the investments made by the shareowners.
The cost of capital is an important financial tool as it sits at the basis of efficient decision making. In other words, the cost of equity portraits whether a certain endeavor or investment has the ability to generate shareholder...
There are several ways to identify the cost of equity, one of the most relevant of them being the Capital Asset Pricing Model. According to Rick A. Cooper (2011) at the Reference for Business website, the Capital Asset Pricing Model is a "mathematical model that seeks to explain the relationship between risk and return in a rational equilibrium market."
With the aid of the CAPM, the cost of equity at Wal-Mart is measured in terms of the "relationship between risk and expected return" (Investopedia, 2011). The formula used in the revealed below:
RA = RF + ssA (RM -- RF), where
RF represents the risk free rate ssA represents the risk of the Wal-Mart security, and RM represents the expected market return.
For simplicity purposes, the risk free rate is accepted at a value of 3 and the expected market return is accepted at a value of 10. This then indicates that (RM -- RF) = 7. In a context in which the risk of the Wal-Mart security is of 0.39, the…
