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Example Calculation of 3-factor Cost of Capital • Microsoft: – Market Beta = 0.98

Example Calculation of 3-factor Cost of Capital • Microsoft: – Market Beta = 0.98 – Size Beta = -0.40 (!) – HML Beta = -1.24 (!) • R stock =R f + E *(R m -R f ) + E SIZE *(R SMB ) + E BM *(R HML ) = 4.87%+0.98*7.95%+(-0.4)*3.32%+ (-1.24)*5.05%

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Example Calculation of 3-factor Cost of Capital • Microsoft: – Market Beta = 0.98

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  1. Example Calculation of 3-factor Cost of Capital • Microsoft: – Market Beta = 0.98 – Size Beta = -0.40 (!) – HML Beta = -1.24 (!) • Rstock=Rf + E*(Rm-Rf) +ESIZE*(RSMB) + EBM*(RHML) = 4.87%+0.98*7.95%+(-0.4)*3.32%+ (-1.24)*5.05% = 5.1% !!!!! 15.535 - Class #13 10

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