Question

What is the cost of common stock equity for General mills? (Use the Capital Asset Pricing Model.) please show the work. search the data please i don't have any

Answer 1

3 year montly beta for General mills is 0.94.

Risk free rate can be taken as the long term return on US treasury bonds. Therefore Rf = 2.66%

Market return can be taken as the long term return on S&P 500 index, this is approximately 10%

Therefore Cost of equity for General mills by CAPM = 2.66% + 0.94 (10%-2.66%) = 9.5596

Answer 2

Calculating General Mills' Cost of Common Stock Equity (CAPM)

To estimate the cost of equity for General Mills (GIS) using the Capital Asset Pricing Model (CAPM), we need the following inputs:

$$\text{CAPM Formula: }{r}_e=r_f+\beta \times (r_m-r_f)$$

Where:

• $r_e$ = Cost of equity

• $r_f$ = Risk-free rate (10-year Treasury yield)

• $\beta$ = Stock’s beta (systematic risk)

• $r_m$ = Expected market return (S&P 500 average)

• 
  

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Step 1: Gather Data (as of latest available)

1. Risk-Free Rate ($r_f$):

• 10-year U.S. Treasury yield ≈ 4.25% (July 2024).

2. Beta ($\beta$):

3. 
   

• General Mills’ beta (β) ≈ 0.45 (Source: Yahoo Finance, Bloomberg).

• Interpretation: GIS is less volatile than the market (defensive stock).

• 
  

4. Market Risk Premium ($r_m-r_f$):

• Historical S&P 500 return ≈ 10% long-term.

• Market premium = $10\mathrm{\%}-4.25\mathrm{\%}=5.75\mathrm{\%}$.

• 
  

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Step 2: Plug into CAPM

$$r_e=4.25\mathrm{\%}+0.45\times 5.75\mathrm{\%}=4.25\mathrm{\%}+2.59\mathrm{\%}=6.84\mathrm{\%}$$

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Answer:

General Mills’ cost of common stock equity ($r_e$) is approximately $\boxed{{\displaystyle 6.84\mathrm{\%}}}$.