12. Cost of equity (in percentage) = Risk-free rate of return + [Beta of the investment ∗ (Market's rate of return − Risk-free rate of return)] Related: Cost of Equity: Frequently Asked Questions. We provide empirical support for our arguments by developing a method for estimating firms’ project CAPM betas and project returns. Re= Rf + β * (Rm – Rf) Expected Rate of Return = 4% + 1. How to Calculate Equity Risk Premium? The equity risk premium (or the “market risk premium”) is equal to the difference between the rate of return received from riskier equity investments (e. 5. Risk/Reward Ratio = $19 / $53. A method for calculating the required rate of return, discount rate or cost of capital The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between the expected return and. We also provide a Regression Line calculator with a downloadable excel. CAPM - Capital Asset Pricing Model Cost of Equity = R f + B(R m - R f) Formula Inputs. The Capital Asset Pricing Model (CAPM) measures the expected return from a given security. ) – CAPM (Intuition) •CAPM – ProjectionsNPV is used to measure the costs and benefits, and ultimately the profitability, of a prospective investment over time. Alpha Calculator. WACC is calculated with the following equation: WACC: (% Proportion of Equity * Cost of Equity) + (% Proportion of Debt * Cost of Debt * (1 - Tax Rate)) The proportion of equity and. 9%. Alpha: What It Means in Investing, With Examples. Interest is the cost of utilizing borrowed money. Quick and easy way to calculate Alpha, Beta and R-Squared We show how to do a regression calculating alpha and beta in CAPM We find that Tesla has a beta of 0. Here are the steps to follow when using this WACC calculator: First, enter the Total Equity which is a monetary value. Here’s how you’d calculate the company’s cost of equity. Here’s how to calculate them –. Enter the alternative “risk free” investment in cell A1. Capital Asset Pricing Model (CAPM). See examples, how to calculateThe formula for calculating Covariance is as follows: Covariance = ∑ (x i – x̄) (y i – ȳ) / (n – 1) Where, x & y = data value of x & y respectively. Specific premium forms can also be calculated separately, known as the market risk premium formula and Risk Premium formula on a Stock using CAPM Using CAPM The Capital Asset Pricing Model (CAPM) defines the expected return from a portfolio of various securities with varying degrees. Input the values into the CAPM formula. In t. Suppose you have the last month prices in column B and this month prices in column C. And the risk-free rate on a treasury bond is 2%. This can be done by using the CAPM (Capital Asset Pricing Model) or Dividend Capitalization Model (if the company pays out a dividend). So, in order to calculate CAPM, you need to use the formula in excel;. From the figure, we can see that Alpha is 3. Although the concepts of the CAPM can appear complex, the application of the model is straightforward. Y is the return rate of a “safe” investment, such as. The risk-free rate refers to the implied yield on a risk-free investment, with the standard proxy being the 10-year. Subtract the risk-free rate from the market (or index) rate of return. How to calculate CAPM (capital assets pricing model) in Excel sheet. Substituting: 25,000 [ (1 – (1/ ( (1 + . t = corporate taxation rate. * I create monthly variable for the months:. Market risk premium is equal to the slope of the security. The CAPM formula can be used to calculate the cost of equity, where the formula used is: Cost of Equity = Risk-Free Rate of Return + Beta * (Market Rate of Return - Risk-Free Rate of Return). 1. In the example, this results in a CAPM of 0. Ensure that the sum of probabilities equals 100%. P (E8:E108,F8:F108)/VAR. The formula for the capital asset pricing model is the risk free rate plus beta times the difference of the return on the market and the risk free rate. The Beta coefficient represents the slope of the line of best fit for each Re – Rf (y) and Rm – Rf (x) excess return pair. k. The formula used to calculate the cost of preferred stock with growth is as follows: kp, Growth = [$4. There are two ways of calculating beta with Excel – the first uses the variance and covariance functions, while the second uses the slope function. This cost of equity calculator helps you calculate the cost of equity given the risk free rate, beta and equity risk premium. It shows that the expected return on a security is equal to the risk-free return plus a risk premium, which is. The cost of equity is calculated using the Capital Asset Pricing Model (CAPM) which equates rates of return to volatility (risk vs reward). What is capital asset pricing model. To do this, just take the price from today minus the price. 4th Step: Determine Expected Return. Upon multiplying the DPS of $2. Where: E (Ri) is the expected return on the capital asset, Rf is the risk-free rate, E (Rm) is the expected return of the market, βi is the beta of the security i. CAPM describes the relationship between risk and expected return and that is used in the pricing of risky securities. Therefore, our calculated MV of Debt is $ 573,441. ȳ = Average of data values of y. The SML is a straight line that starts from the risk-free rate and has a positive slope equal to the market risk premium (the excess return of the market over the risk-free rate) multiplied by beta. It is based on the premise that the expected return of a trading position should be in line with the market's implicit risk premium. . where: w n refers to the portfolio weight of each asset and E n its expected return. In shorthand this model is expressed as: Return = Rf + Ri + SMB + HML. The market risk premium is part of the Capital Asset Pricing Model (CAPM) which analysts and investors use to calculate the acceptable rate of return for an investment. The beta formula is used in the CAPM model to calculate the Cost of Equity as shown below –. 0%) to arrive at $87. The Capital Asset Pricing Model (CAPM) describes the relationship between the expected return and risk on any asset or portfolio. Then, calculate the beta of the portfolio using a weighted average of all the securities. Step 2 – Calculate EPS Over the Holding Period. Intrinsic Value Formula. The template allows users to input the risk-free rate, expected market return, and beta of security into pre-programmed cells. 8* (12% – 4%) E r = 18. ‘Cost of Equity Calculator (CAPM Model)’ calculates the cost of equity for a company using the formula stated in the Capital Asset Pricing Model. Using Correlation Method – Example #1. Therefore, the WACC can be viewed as a break-even return that determines the profitability of a project or an. Also Read: Beta Coefficient in Finance. e. Capital Market Line - CML: The capital market line (CML) appears in the capital asset pricing model to depict the rates of return for efficient portfolios subject to the risk level ( standard. CAPITAL ASSET PRICING MODEL Objectives: After reading this chapter, you should 1. Let me illustrate this with a simple example. The Capital Asset Pricing Model and Risk Premiums. . Above, calculation, suggests Microsoft is the better investment as per the Risk/Reward ratio. An asset’s expected return refers to the loss or profit that you anticipate based on its anticipated or known rate of return. The CAPM is used to calculate the expected return on a security. It is basically used to calculate the stock’s expected stock return. Step 2: Press Enter to get the Result. The general equation of this type of line is. . Learn how to calculate Beta on Microsoft Excel with this step-by-step tutorial! This simple, yet easy to understand video provides you with the ability to ca. CAPM comprises three core components: the risk-free return, the market risk premium, and Beta. A portfolio's expected return and. Note that, except for alpha, this is the equation for CAPM - that is, the beta you get from Sharpe's derivation of equilibrium prices is essentially the. Cost of Equity Example in Excel (CAPM Approach) Step 1: Find the RFR (risk-free rate) of the market. Resize the cell so that all the label text is visible. Step 5 – Calculate Beta – Three Methods. As a preface for our modeling exercise, we’ll be calculating the cost of debt in Excel using two distinct approaches, but with identical model assumptions. The CAPM formula is: Cost of Equity (Ke) = rf + β (Rm – Rf) Solve for the asset return using the CAPM formula: Risk-free rate + (beta_(market return-risk-free rate). Equity risk premium = 5%. S. The discount rate element. So, in order to calculate CAPM, you need to use the formula in excel; = (Risk-free rate of interest/return (Rf) + Beta (β) x (Expected return of market E (Rm) – Risk-free rate of interest/return (Rf)) Type the following formula in cell C11 and press ENTER to get the Expected Rate of Return. #3 – Correlation Method. Video of the Day Tip. 056175) matches what we have on the Returns tab. Capital Asset Pricing Model (CAPM). βi = refers to the beta of security. The capital market line is a tangent line and represents asset and investment mixtures. CAPM is calculated according to the following formula: Where: Ra = Expected return on a security Rrf = Risk-free rate Ba = Beta of the security Rm = Expected return of the. n = number of periods included. The steps are; Gather the stock exchange and index data. gen m_rf = ln(1 + m_Rf). Calculating CAPM Beta. You need to provide the three inputs,. To compute the annualized standard deviation, we only need to compute the square root of the annualized variance. Step 3: Insert the formula =1+ (1-B6)*B7 in cell B8 to calculate the denominator of the Unlevered Beta Formula. Alpha Defined Alpha is computed in relation to the. The formula for the capital asset pricing model is the risk free rate plus beta times the difference of the return on the market and the risk free rate. Step 1: Put the returns of your portfolio and the benchmark index into Excel, and calculate the average returns. Then, divide the cash flow for the period by the result. Step 1: We first need to calculate the debt-equity ratio. 62%. In the context of portfolio management, alpha (α) is defined as the incremental returns from a portfolio of investments, typically consisting of equities, above a certain benchmark return. . This gives you the fair value price you should pay for a stock. Return on Invested Capital is calculated by taking into account the cost of the investment and the returns generated. Step 3: The next step is to calculate the portfolio Beta, which will be used to calculate the expected returns using CAPM. format period %tm. So we have calculated the expected return using the CAPM approach as follows: E r = R f + β (R m – R f) E r = 4+1. Below is the expanded formula for the CAPM. What is the CAPM formula? CAPM Formula. 1) Capital asset pricing model (CAPM) The CAPM is a very popular model as it captures the expected return and the risk of volatility (systematic risk) in those returns. CAPM, Diversification, & Using Excel to Calculate Betas The Capital Asset Pricing Model (CAPM ) • Equilibrium model that underlies all modern financial theory • Derived using principles of diversification with simplified assumptions • Markowitz, Sharpe, Lintner and Mossin are researchers credited with its development (early 1970’s) • Basic. Below is the formula for the cost of equity:. First formula to calculate CAPM. Example #3. Calculate WACC (Weighted Average Cost of Capital) in Excel 2020. The Capital Asset Pricing Model (CAPM) states that the expected return on an asset is related to its risk as measured by beta: E (Ri) = Rf + ßi * (E (Rm) – Rf) Or = Rf + ßi * ( risk premium) Where. One commonly used method to calculate Re is the Capital Asset Pricing Model (CAPM), which considers the risk-free rate, the market risk premium, and the company’s beta. At the center of the CAPM is the concept of risk (volatility of returns) and reward (rate of returns). Here I have dispensed with all the constant terms, and also used the usual CAPM assumption that $epsilon$ represents idiosyncratic volatility, so $ ext{Cov}(epsilon_A, epsilon_B) = 0$, $ ext{Cov}(R_M, epsilon_A) = 0$ and $ ext{Cov}(R_M, epsilon_B) = 0$. In this example we'll use the CAPM: Step 2: Calculate the cost of equity. This is a supplement to the investment courses I teach. The expected return of General Motors is calculated by entering the formula "=C2+C3* (C4-C2)" into cell C5. The minimum required rate of return formula for a stock not paying any dividend can be calculated by using the following steps:. Risk Premium Formula in Excel (With Excel Template) Here, we will do the same example of the Risk Premium formula in Excel. 7. Solve for Ei by multiplying beta and the difference between. So we have calculated the expected return using the CAPM approach as follows: E r = R f + β (R m – R f) E r = 4+1. This is an open-access Excel template in XLSX format that will be useful for anyone who wants to. 21 today based on a price of $283. Market Risk Premium: The market risk premium is the difference between the expected return on a market portfolio and the risk-free rate. To begin calculating NPV, it's important to calculate the individual present values for each period, such as each month, quarter or year. This fraction is the beta figure, typically expressed as a decimal value. X-Axis → Beta (β) Y-Axis → Expected Return. Once you have the formula in the function, just use the function in the spreadsheet as you would with any other function - ie =CAPM(I2,B2,B3) will give the. Identify the rate of return and constant growth rate of dividends and subtract them. Rf = refers to the risk-free rate of interest. The formula used is CAPM and WACC. We go over (in Microsoft Excel) how to arrive at the Risk-Free Rate, how to calculate the Beta of a. The formula is: K c = R f + beta x ( K m - R f ) where. This CAPM calculator will allow you to quickly find the expected return on a stock using the CAPM. At the same point in time, the thirty-year treasury bond rate in the United States. There are two ways the SIM can be expressed, either in " raw returns " (aka ordinary returns) or in " excess returns . For Investment 1. . So over time you can see the impact of a dollar (1. Select the model you want to use. Follow these steps to calculate β in Excel: Obtain the weekly prices of the stock; Obtain the weekly prices of the market index (i. In this video we will know how to Calculate CAPM Alpha & CAPM Beta, Jensen Alpha for Stock / Strategy in excelHow to Install the Data Analysis ToolPak in Mi. The cost of equity is the perceptional cost of investing equity capital in a business. Check out our website - have just launched our Excel for Beginner's course, helping you harness the power of Excel qui. 3. e. 00] + 2. There are different ways to measure risk; the original CAPM defined risk in terms of volatility, as measured by the investment's beta coefficient. How do you calculate CAPM in Excel? Solve for the asset return using the CAPM formula: Risk-free rate + (beta_(market return-risk-free rate). As a percentage, 33. R f: Risk-free rate of return. 1. Calculate the beta of a stock from its historical data. Enter this into your spreadsheet in cell A4 as "=A1+ (A2_ (A3-A1))" to calculate the expected return for your investment. CAPM Beta coefficient formula notation. Step 1: Put the returns of your portfolio and the benchmark index into Excel, and calculate the average returns. Let’s break down the answer using the formula from above in the article: Expected return = Risk Free Rate + [Beta x Market Return Premium] Expected return = 2. 2 percent. DCF Formula in Excel. Divide the first difference above by the second difference above. The unlevered beta of listed companies is available at many stock market databases. If you want to calculate your return for a specific time period rather than over the entire life of the portfolio, enter the value of the account on the starting date as the first contribution. The return on the market is 15% and the risk-free rate is 6%. This risk-free rate should be inflation-adjusted. In the example, this results in a CAPM of 0. Therefore, the effective discount rate for David in this case is 6. However, we observe that this stock has a positive intercept value after accounting for the risk-free rate. Apply it to determine the risk, return, or the price of an investment. Additionally, Beta is an integral part of the Capital Asset Pricing Model (CAPM). CAPM Formula. #2 -By Slope Method in Excel. The CAPM formula requires the rate. Abnormal return, also known as “excess return,” refers to the unanticipated profits (or losses) generated by a security/stock. By assessing the risk-adjusted return of an investment, investors can determine the cost of capital, which is the required return on investment a business needs to stay profitable. Cash Flow Cash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. Yield to Maturity (YTM) = [Annual Coupon + (FV – PV) ÷ Number of Compounding Periods)] ÷ [ (FV + PV) ÷ 2] The components of the yield to maturity (YTM) equation consist of the following inputs: Coupon Payment (C) → Determined by the coupon rate of the bond, or. 4. FVj = Net cash flow for the j th period (for the initial “Present” cash flow, j = 0. Using the CAPM formula we can find the expected return for an asset. R f. Us. Calculate the price changes percentage in each day. The capital asset pricing model provides a formula that calculates the expected return on a security based on its level of risk. paid its shareholders dividends of $1. 21. Example 1. . Excel, Yahoo Finance, and 90 Day T-bill data from the US Federal Reserve to calculate the expected return of a s. Return is the rate of return on your portfolio or investment being measured. MPS = Market Price per Share. 064; Required Rate of Return = 6. Let’s say that ABC Corp. 16:14 Lecture 05 Mean-Variance Analysis and CAPM Eco 525: Financial Economics I Slide 05-6 Overview • Simple CAPM with quadratic utility functions (derived from state-price beta model) • Mean-variance analysis – Portfolio Theory (Portfolio frontier, efficient frontier,. 07 * 0. Highlight cells D2 through D4 and then click on the "Insert" tab. The portfolio beta is denoted by β. 5%] Expected return = 11. CAPM: Here is the step by step approach for calculating Required Return. 64% and the average US Treasury bill return of 3. Step 2. Assess the risk-free rate of your asset. Practically any investments you take, it at least carries a low risk. To calculate the minimum annual return that we will demand as shareholders, and which we will call “Ke”, the CAPM model will be used (“Capital. Calculate the beta of a stock from its historical data. CAPM Formula. Cost of equity - CAPM. The following formula shows how to arrive at the risk-free rate of return: Risk Free Rate of Return Formula = (1+ Government Bond Rate)/ (1+Inflation Rate)-1. P (F8:F108) =SLOPE (E8:E108,F8:F108) You could also calculate beta simply by plotting. Capital Allocation Line - CAL: The capital allocation line (CAL), also known as the capital market link (CML), is a line created on a graph of all possible combinations of risk-free and risky. Solve for the asset return using the CAPM formula: Risk-free rate + (beta_ (market return-risk-free rate). What is the Fama-French Three-factor Model? The Fama-French Three-factor Model is an extension of the Capital Asset Pricing Model (CAPM). To calculate the intrinsic value of a stock, you estimate a company’s future cash flow, discount it by the compounded inflation/interest rate, and divide the result by the number of shares outstanding. 4 % Explanation. The CAPM assumes a straight-line relationship between the beta of a traded asset and. 4 % Explanation. Step 2 – Calculate EPS Over the Holding Period. Total debt = $154,679. MarketXLS® completely automates the process of calculating the Efficient frontier using excel to get the optimal portfolios which tend to lie along the efficient frontier. Step 3 – Prepare a single sheet of Stock Prices Data & Index Data. First, we have to calculate the cost of equity using the capital asset pricing model (CAPM). The equation for its expected return is as follows: Ep = w1E1 + w2E2 + w3E3. Start by figuring out a given stock’s risk-free rate of return. Beta compares the risk of the asset to the market, so it is a risk that, even with diversification, will not go away. Step 3: Finally, the calculation of expected return equation of the portfolio is calculated by the sum product of the weight of each investment. An Example Using the data from the covariance matrix above, this section will show how to carry out a CFA in Excel and to calculate parameter estimates and fit statistics. r D – cost of debt. This enables one to define a matrix and refer to it by name. One approach to calculating NPV is to use the formula for discounting future cash flows, as is shown in row 6. Essentially, the question is, “Is the return on this asset worth the investment?” In this tutorial, we’ll apply the CAPM model to see whether or not a particular stock is worth the investment using a multiple regression. Here, the cost of debt is $640,000. The measurement of the cost of debt. By accumulating and tracking these over your certification cycle you can maintain your certification status with PMI. e. Let’s do Apple as an example: The risk-free rate as of today (July 24,. Understand the Capital Asset Pricing Model. * I calculate the continuously compounded return from the simple returns:. The following formula shows how to arrive at the risk-free rate of return: Risk Free Rate of Return Formula = (1+ Government Bond Rate)/ (1+Inflation Rate)-1. #2 -CAPM Model. As model auditors, we see this formula all of the time, but it is wrong. Average weighted maturity = 37. 1. #3 – Correlation Method. β → Beta. g. =C6+C7* (C8-C6) After that, type the following formula in cell C12 and hit ENTER to get the value of Alpha. 98%. CAPM evolved as a method of measuring systematic risk. 14. Where, CFt = cash flow. Step 4: Press Enter to get the Result. There are many ways to model stock returns, but the Capital Asset Pricing Model, or CAPM, is one the most well known: E ( R P) − R F = β P ( E ( R M) − R F) E ( R P) − R F: The excess expected return of a stock or portfolio P. To calculate the value of a stock using CAPM, multiply the volatility , known as " beta ," by the additional compensation for incurring risk, known as the "Market Risk. Step 2: Next, calculate the average return for both stocks: Step 3: After calculating the average, we take a difference between the returns ABC, return, and ABC’s average return similarly between XYZ and XYZ’s return average return. The short term rate of China’s government bills is 2. CAPM Formula with its components. The template automatically calculates the security's expected return using the CAPM formula. To find the expected return of an asset using CAPM in Excel requires a modified equation using Excel syntax, such as =$C$3+ (C9* ($C$4-$C$3)) CAPM can also be used with other metrics like. E (Rm) = the expected return on the market portfolio. The formula you require is already in the post and as you have named the function the same as the formula (CAPM), then add it to the function. Define your risk free rate. Step by Step Beta Calculation. CAPM Formula: E (Ri) = Rf + βi (E (Rm) – Rf) where: E (Ri) = refers to the expected return on the capital asset. Press "Calculate" to obtain expected return, variance, and standard deviation. Put simply, CAPM estimates the price of a high-risk stock by linking the relationship between the risk of the stock and the expected return. Taylor. R e = R f + Beta × Market Risk Premium R e = R f + Beta × ( R m - R f) 15. To calculate the market risk premium, you'll need to determine the difference between the expected market return and the risk-free rate. The Capital Asset Pricing Model * Measures risk in terms on non-diversifiable variance * Relates expected returns to this risk measure. Required Rate of Return = (2. risk premium = beta × (Rm - Rf), where: R – Expected rate of return of an asset or investment; Rf – Risk-free interest rate, typically taken as the yield on a long-term government bond in the country where the. 2. It is the rate of return where the investor’s money is not at Risk-like treasury bills Treasury Bills Treasury Bills (T-Bills) are investment vehicles that allow investors to lend money to the government. However, the concepts behind CAPM can help us understand the connection. The CAPM formula requires the rate of return for the general market, the beta value of the stock, and the risk-free rate. 5% from the stocks. Stocks that are above the line constitute a good risk. Asset pricing models consist of estimating asset expected return through its expected. You can also easily calculate the CAPM using the formula in the template provided. The capital asset pricing model (CAPM) equation is. A to decide which investment he prefers or he may choose to invest in both companies by dividing his investment. However, the concepts behind CAPM can help us understand the connection. it means whatever the investor is expecting the rate of return, decides its rate of premium. These inputs can be inserted in the following formula. The cost of equity is commonly calculated with CAPM (Capital Asset Pricing Model). more. Equity investing utilizes the capital asset pricing model (CAPM) to find the RRR. We dive into a quick example and look at how it can be used to help value a stock. To do so, you can use the formula =((Cell2-Cell1)/Cell1) *100, where cell 1 refers to the previous period data point, and cell 2 refers to a current period data point. P Functions. The CAPM was proposed by its founders to better explain. Using the CAPM: E(ri) = Rf + βi (E(rm) – Rf) = 4 + (1. So we simply take our current EPS of 9. Course Curriculum: Objective. (rm – rf) → Equity Risk Premium (ERP) CAPM Simple Example. D = Debt market value. 2. 12. A standardized beta compares the strength of the effect of each independent variable to the dependent variable. Step 1: Firstly, the return from each investment of the portfolio is determined, which is denoted by r. NPV is used to measure the costs and benefits, and ultimately the profitability, of a prospective investment over time. Firstly, we have to create a dataset that must. CAPM can be used to determine an asset's expected return – which is calculated by multiplying its beta (a measure of volatility) by the expected return of a market index (such as the S&P 500) and adding a risk-free rate. Select a spreadsheet cell and type the column label for the expected return. The CAPM formula is: Cost of Equity (Ke) = rf + β. Country Default Spreads and Risk Premiums. The formula for calculating the cash conversion cycle sums up the days inventory outstanding and days sales outstanding, and then subtracts the days payable outstanding. However, we observe that this stock has a positive intercept value after accounting for the risk-free rate. This value can then be compared with the market cap and. 69, and consecutively multiply it by 6% for each year. Step 3. Follow these steps to calculate a stock’s expected rate of return in Excel: 1. Now, if we look at the averaging the total debt over the last several years, we get: 2022 = $154,679. Industry Name: Number of firms: Beta : D/E Ratio: Effective Tax rate: Unlevered beta: Cash/Firm value: Unlevered beta corrected for cash: HiLo Risk: Standard deviation of equity3. CAPM is built on four major assumptions, including one that reflects an unrealistic real-world picture. It is flawed as far as it relies on risk and returns distributions, the behavior of other investors, and some fundamentals of the market, that do not exist in the same form in reality. tsset period time variable: period, 1934m1 to 2019m6 delta: 1 month. The Capital Asset Pricingn Model (CAPM) is a formula used to determine whether investing in a partiular asset is profitable. Therefore, the Calculation of the Alpha of the mutual fund will be as follows –. Method #1 – Dividend Discount Model. It will return the slope of the linear regression line through the data points in known_y’s and known_x’s. Enter your name and email in the form below and download the free template now! The market risk premium is the additional return an investor will receive (or expects to receive) from holding a risky market portfolio instead of risk-free assets. The CAPM is often used to calculate the cost of equity (r e ),. The capital asset pricing model provides a formula that calculates the expected return on a security based on its level of risk. P(), and VAR. The risk premium for a specific investment using CAPM is beta times the difference between the returns on a. RRR = w D r D (1 – t) + w e r e. 2. 5. CAPM’s main strength – and its primary weakness – is that it assumes one single source of risk (i. After plugging all of that into our formula, we get the market value of debt of $154,679, equal to the book value. 36. In this video, we look at the capital asset pricing model - CAPM for short. Market Risk Premium = R m – R f. The data for the Fama-French risk factors is available on Kenneth.