Business Case Studies, Financial Management & Corporate Finance Case Study, Cost of Equity, CAPM Approach

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Case Title:

Cost of Equity: A CAPM Approach

Publication Month & Year : July 2009

Authors: Manish Agarwal & D. Satish

Industry: Cement

Case Code: FM0012

Teaching Note: Available

Structured Assignment: Available

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The case study was written to understand the cost of equity using the Capital Asset Pricing Model (CAPM). CAPM is widely used to calculate the cost of equity while calculating the cost of capital of a firm. CAPMis also widely used to calculate the cost of equity for discounting cash flowof projects and other investments made by companies. The case takes two Sensex heavyweights - one which is aggressive (Jai prakash Associates) and the other which is passive (Sun pharmaceuticals) – to calculate the cost of equity using CAPM. The case also provides scope for discussion on using different methods of calculating cost of equity.

Pedagogical Objectives:

  • To provide plat form for discussion on different methods available for estimating cost of equity
  • To understand the efficacy and operating dynamics of CAPM and weigh the merits of this method vis-à-vis other methods of estimating cost of equity
  • To compare the cost of equity calculation of two different companies, one with higher risk and the other with lower risk, using CAPM Approach.

Keywords : Cost of capital; Cost of Equity; Cost of Debt; Weighted Average Cost of Capital; WACC; Capital Asset Pricing Model; CAPM; GDR; MBA; Financial Management; Finance for Managers; Managerial Finance; Business Finance; Corporate Finance; Principles of Financial Management; Course Case Maps; Course Case Packs; Financial Management Course Case Pack; Financial Management Course Case Map

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