### Unit 6: Applying the CAPM Model

This unit puts what you have learned from the previous units about cost of capital, net present value, and risk into one widely used model: The CAPM model. The CAPM model is used to compute a company's costs of capital that can be used in net present value calculations. It has been used in court cases for estimating a company's stock value as with the case of the breakup of AT&T in 1984 that resulted in seven companies. Also, the CAPM model is used in computing stock valuation. This unit will show how the financial manager uses this financial tool to value stock and to determine which stocks are the better options for investors, based on their rates of returns and how they compare to the overall stock market return.

**Completing this unit should take you approximately 2 hours.**

Upon successful completion of this unit, you will be able to:

- explain what the CAPM measures and its components;
- compute a company's expected rate of return using past stock data;
- apply the results from the CAPM model into net present value calculations; and
- recommend financial decisions based on a company's expected rate of return calculation.

### 6.1: Calculating the Cost of Capital using CAPM

This section discusses how to price risky securities in order to determine if an investment should be undertaken. Why is this important? The answer is contained in the discussion that describes how to determine the expected rate of return of an asset. When you finish with this section, you should understand the terms systematic risk, systematic risk and beta. Most importantly, by understanding the Capital Asset Pricing Model (CAPM), you will be able to determine if an investment should be undertaken.

This section provides an overview of the cost of capital. In addition to the Weighted Average Cost of Capital (WACC), topics discussed in this section include flotation costs, cost of debt, cost of preferred stock, cost of common stock. Examples and problems are presented to show why this WACC is important.

### Unit 6 Assessment

Take this assessment to see how well you understood this unit.

- This assessment
**does not count towards your grade**. It is just for practice! - You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.

- This assessment