Investing Basics - Feel free to ask the most basic questions

The actual procedure is:

  1. Get NIFTY50/SENSEX Data for 3-5 years and calculate daily or weekly returns in Excel.
  2. Get the stock’s price history for the same period and calculate daily or weekly returns in Excel.
  3. Use =SLOPE(Stock Returns,NIFTY/SENSEX Returns)

You can by-pass these three steps and get the Beta published online on many sites, but that’s a decision left up to you. Else, by doing the process above, you will end up with a ‘Beta’ figure.

  1. Find out the Risk-free Rate in India. As of this moment, it’s 7.37% (India - 10-Year Government Bond Yield 2024 | countryeconomy.com)
  2. Find out NIFTY or SENSEX’s returns over the same period for which Beta was calculated (If you did it yourself, this would become very easy)
  3. Use the formula Risk-free Rate + Beta * (NIFTY/SENSEX Return - Risk-free Rate)

You will have now calculated the Cost of Equity.

  1. Find out the Cost of Debt of the company. This could be mentioned in the Annual Report. Or you could make a rough guess from their Credit Rating (AAA Bonds in India are trading at close to 7.5% if I’m not wrong)
  2. Use the formula Cost of Equity * ((Equity+Reserves)/(Equity+Reserves+Debt)) + Cost of Debt * (Debt/(Equity+Reserves+Debt))

This would give you the CAPM-based Cost of Capital of your company.

If you are interested, you can visit my thread. The model there contains automatic formulas for calculating both CAPM Cost of Capital and Bottom-up Cost of Capital (Often quoted to be a better measure of risk than the CAPM Cost of Capital):

You will have to input: Equity, Debt, Risk-free Rate, Company Beta, Industry Beta and Industry D/E Ratio in order to successfully calculate both of them. Once that is done, under ‘Assumptions’, select ‘Company Beta’ to find out the CAPM Cost of Capital or select ‘Industry Beta’ to find out the Bottom-up Cost of Capital.

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