CAPM and Sources for Capital

Introduction

CAPM and sources of capital are an important factor to analyze the trend of the stock and construction of the portfolio. There are various component of CAPM and sources of capital on basis of which company’s overall portfolio and cost of funds can assist in making investment decision. This paper will demonstrate this concept and the company that has been selected for this purpose if Domino’s Pizza.

Discussion

Overview of Company

Domino’s Pizza is an international franchise specializing in fast food around the pizza. Today, more than 9,000 outlets in 60 countries including 205 Domino’s in France and 20 in Belgium.

Part a) Beta — Domino’s Pizza

Beta:

0.8

As it is common that investment in the stock can be risky or volatile and how to measure this volatility of the shares. The Beta coefficient (ß) is a measure of the volatility of an asset i.e. the level at which price fluctuation with the index (a stock or a value) on the variability of the market, so that higher values. denote more volatility and Beta 1.0 is equivalent to the market.

The differences between the Beta (ß) of a stock or a value 1.0 are expressed in percentage of volatility. A Beta value 1.75 is 75% more volatile than the market. Similarly, a value 0.7 Beta would be 30% less volatile than the market (Jagannathan, Ravi & McGrattan, 1995).

A value 0.8 Beta of Dominos pizza state that they are 20% less volatile than market. This also indicates that company is less risky. Furthermore, for specific values. or actions, the Beta coefficient (ß) is calculated using regression analysis against an index representing the market value, for example INDEX of U.S. stock market. Beta as a way to estimate the risk of assets on average assets, the Beta coefficients are used to diversify the composition of a portfolio of assets, assets with ß conveniently mixing different.

Beta measures only systematic risk, i.e. risk that cannot be eliminated by diversifying the portfolio in various asset classes. Thus an investor who has money concentrated in a few businesses (e.g. the founding partner of a company that has invested there most of his personal wealth) will not find the beta as a proxy measure of risk; since underestimate the same specific risk (Reilly, Frank K. & Brown, Keith C. 2003).

Part b) Cost of Equity and CAPM

Beta = 0.8

Rf = 4.5%

Rm = 6.5%

Re=?

In order to calculate the Cost of equity of Domino pizza, the following formula will be used:

E (Ri) = Rf + ßi (E(Rm) — Rf)