Question

Last week the price of Costco's (Ticker: COST) common stock closed at $302.50 per share. Use the data below to compute Costco's beta, then use the beta to estimate its required cost of equity. The prices have been adjusted for dividends and stock splits. Assume the appropriate risk-free rate is 3.50% and the market risk premium is 5.5%. Show your beta to 4 decimal places. Notice the ordering of the dates when estimating the beta.

Costco's Beta = ________      Costco's Cost of Equity Capital = _______ %

Friday Closing Prices for Costco (COST) and the S&P 500 Index

Week of	Costco Friday Close	SP500 Friday Close
5/13/19	247.75	2859.53
5/20/19	246.75	2826.06
5/27/19	239	2752.06
6/3/19	255.5	2873.34
6/10/19	259.5	2886.98
6/17/19	265.5	2950.46
6/24/19	263.75	2941.76
7/1/19	267.75	2990.41
7/8/19	278.75	3013.77
7/15/19	281	2976.61
7/22/19	280.75	3025.86
7/29/19	272.5	2932.05
8/5/19	273	2918.65
8/12/19	273.5	2888.68
8/19/19	273.5	2847.11
8/26/19	294	2926.46
9/2/19	303.75	2978.71
9/9/19	292	3007.39
9/16/19	286.25	2992.07
9/23/19	286	2961.79
9/30/19	291.75	2952.01
10/7/19	297.5	2970.27
10/14/19	302.5	2997.95

Answer 1

Beta is given by the formula

$\beta = Covariance(CostCo Returns, S&P500 Returns)/Variance(S&P500 Returns)$

F2 - X ✓ fc =COVARIANCE.P(D2:D23,E2:E23)/VAR.P(E2:E23) Beta of Costco =COVARIANCE.PD2:D23, E2:E23)/VAR.P(E2:E23) 7 1 Costco Friday Close 2 247.75 3 246.75 4 239 5 255.5 6 259.5 265.5 8 263.75 9 267.75 10 278.75 11 281 12 280.75 13 272.5 14 273 15 273.5 16 273.5 17 294 18 303.75 19 292 20 286.25 21 286 22 291.75 23 297.5 24 302.5 S&P 500 Friday Close 2859.53 2826.06 2752.06 2873.34 2886.98 2950.46 2941.76 2990.41 3013.77 2976.61 3025.86 2932.05 2918.65 2888.68 2847.11 2926.46 2978.71 3007.39 2992.07 2961.79 2952.01 2970.27 2997.95 Costco returns =(B3-B2)/B2 =(B4-B3/B3 =(B5-B4)/B4 =(B6-B5)/B5 =(B7-B6)/B6 =(B8-B7)/B7 =(B9-B8)/B8 =(B10-B9)/B9 =(B11-B10)/B10 =(B12-B11B/B11 =(B13-B12)/B12 =(B14-B13)/B13 =(B15-B14)/B14 =(B16-B15)/B15 =(B17-B16)/B16 =(B18-B17)/B17 =(B19-B18/B18 =(B20-B19)/B19 =(B21-B20)/B20 =(B22-B21)/B21 =(B23-B22)/B22 =(B24-B23)/B23 S&P500 Returns =(C3-C2)/C2 =(C4-C3)/C3 =(C5-C4)/C4 =(C6-C5)/C5 =(C7-C6)/C6 =(C8-C7)/C7 =(C9-C8)/C8 =(C10-C9)/C9 =(C11-C10)/C10 =(C12-C11)/C11 =(C13-C12)/012 =(C14-C13)/C13 =(C15-C14)/C14 =(C16-C15)/C15 =(C17-C16)/C16 =(C18-C17)/C17 =(C19-C18)/C18 =(C20-C19)/C19 =(C21-C20)/C20 =(C22-C21)/C21 =(C23-C22)/C22 =(C24-C23)/C23

G2 - x fc =COVARIANCE.P(E2:E23,F2:F23)/VAR.P(F2:F23) в G 1 Week of Costco Friday Close SP500 Friday Close Costco Returns S&P 500 Returns Beta of Costco 2 5/13/19 247.75 2859.53 -0.004036327 -0.011704721 1.2000! 3 5/20/19 246.75 2826.06 -0.031408308 -0.026184865 4 5/27/19 239 2752.06 0.069037657 0.044068807 5 06-03-2019 255.5 2873.34 0.015655577 0.004747089 6 06-10-2019 259.5 2886.98 0.023121387 0.021988375 7 6/17/19 265.5 2950.46 -0.006591337 -0.002948693 8 6/24/19 263.75 2941.76 0.015165877 0.016537719 9 07-01-2019 267.75 2990.41 0.0410831 0.007811638 10 07-08-2019 278.75 3013.77 0.008071749 -0.012330072 11 7/15/19 281 2976.61 -0.00088968 0.016545668 12 7/22/19 280.75 3025.86 -0.029385574 -0.031002756 13 7/29/19 272.5 2932.05 0.001834862 -0.004570181 14 08-05-2019 273 2918.65 0.001831502 -0.010268446 15 08-12-2019 273.5 2888.68 0 -0.014390656 16 8/19/19 273.5 2847.11 0.074954296 0.027870367 17 8/26/19 294 2926.46 0.033163265 0.017854336 09-02-2019 303.75 2978.71 -0.038683128 0.009628329 19 09-09-2019 292 3007.39 -0.019691781 -0.005094118 20 9/16/19 286.25 2992.07 -0.000873362 -0.010120084 21 9/23/19 286 2961.79 0.020104895 -0.003302057 22 9/30/19 291.75 2952.01 0.019708655 0.006185616 23 10-07-2019 297.5 2970.27 0.016806723 0.009319018 24 10/14/19 302.5 2997.95 18

Cost of Equity is given by

$K_{e} = R_{f}+\beta *(R_{m}-R_{f})$

where

$K_{e} = Cost of equity$

$R_{f} = Risk Free Rate$

$\beta = Beta of the company$

$R_{m} = Market Returns$

$(R_{m}-R_{f}) = Market Risk Premium$

=C2+C1*C3 1 Beta 2 Risk Free Rate 3 Market Risk Premium 4 Cost of Equity 1.2 10.035 0.055 =C2+C1*C3

(4 x ✓ с fix в 1 Beta 2 Risk Free Rate 3 Market Risk Premiun 4 Cost of Equity 1.2 3.50% 5.50% 10.100%