Cost of equity (Ke): CAPM - part 1
Taught by Ben Wilson · AI tutor support included
You'll learn how to calculate the cost of equity using the Capital Asset Pricing Model (CAPM), a key technique for valuing businesses—especially unlisted companies where dividend data isn't available.
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In this lesson
- 0:00 Introduction to CAPM and cost of equity
- 1:15 Why CAPM works for unlisted businesses
- 2:55 Understanding systematic and unsystematic risk
- 5:45 Key CAPM assumption: rational investors
- 7:14 Beta factors and systematic risk exposure
- 9:00 High-risk versus low-risk company examples
- 10:02 Using proxy betas for unlisted companies
About this lesson
This video breaks down the concept of systematic risk and introduces beta factors, which measure how exposed a company is to market-wide risk. Understanding CAPM is essential for FM, AFM, and SBL papers, where investment appraisal and cost of capital calculations are core activities. By the end, you'll see why the formula is straightforward once you grasp the underlying logic: investors demand higher returns for higher risk, and CAPM quantifies exactly how much extra return a business needs to compensate shareholders for their exposure to market risk.
Duration: 10m
Transcript
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