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What is the drawback of using capm

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Reference no: EM132771621

John plc has 10 million shares outstanding and the current share price is £4. These ordinary shares have a beta of 1.5. The risk-free rate on government bonds is 5% per year and the expected rate of return on the market portfolio is 15% per year.

i) Use the CAPM model to calculate the firm's cost of equity

ii) Assuming the corporation tax rate is 30%, what is the weighted average of cost of capital (WACC) if the market value of its debt is £10m with costs of 10% per year before allowing for tax shield benefits?

iii) What is the drawback of using CAPM to estimate cost of capital?

Reference no: EM132771621

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