Southwest Airlines
The capital asset pricing model (CAPM) is a method that is commonly used to determine the cost of equity for a company. The formula for CAPM is:
Investopedia (2012)
According to MSN Moneycentral (2012), the beta for Southwest Airlines is 1.13.
The risk free rate, based on the one-year Treasury yield, is 0.17% at present (U.S. Department of the Treasury, 2012). We are assuming a 7% market risk premium, as is customary.
This results in a CAPM calculation as follows:
Ra = Rf + ? (Rm-Rf)
Ra = 0.17 + (1.13) (7)
Ra = 0.17 + (7.91)
Ra = 8.08%
Therefore, according to CAPM, the cost of equity for Southwest Airlines is 8.08%.
We would assume that the 10.2% figure is for a beta…
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