Primary risks and equity costs at Capital One Financial Corporation

Capital One

There are a number of risks facing Capital One in the near future. As a financial institution, Capital One faces interest rate risk, in particular given the possibility of a perpetually low interest rate environment (2011 Annual Report, p.2).

There is also the risk that economic recovery will not be strong, given the dependency of Capital One on consumer spending, in particular the rise of consumer debt (2011 Annual Report, p.18). There are also significant risks in the regulatory environment, as banking is a heavily-regulated industry and there are a number of changes proposed to the regulatory environment (p.20).

The company has a number of strategies to mitigate these risks. It addresses interest rate risk by utilizing different financial assets, including different brands and sources of capital, to lower its cost of capital. Geographic diversification also helps to mitigate economic risk, although the company does still have concentration in a handful of U.S. markets, its national portfolio plus businesses in the UK and Canada help mitigate American economic conditions. Lastly, the bank addresses the regulatory environment proactively through lobbying but also through compliance efforts to ensure that it conforms with all established and emerging regulatory standards.

2. Using the five-year stock price chart from MSN Moneycentral and mid-November as the relevant time period, the five-year stock price table for Capital One is as follows:

Price

Change

2012

55.70

+32.3%

2011

42.07

+6.0%

2010

39.69

-0.5%

2009

39.89

+37.22%

2008

29.07

The average price over this period is $41.44. The average return is +18.76%. The standard deviation of returns is 17.65%. These figures were calculated on Excel.

3. The formula for the capital asset pricing model is as follows:

Ra = Rf + ?(Rm-Rf)