Implied cost of equity, CAPM and financial services companies on the JSE : an empiric investigation

Abstract

The CAPM has been in existence for almost 60 years and still conjures up robust arguments particularly from the sphere of business. The pertinence of the CAPM to academia is that it resides fundamentally in archival publications and there has been a dynamic shift from the sphere of business towards other more modern models for pricing assets. The stamina of the CAPM eminates from its simplicity. It allows for relatively accurate estimations of requisite returns as well as costs of equity in a straightforward manner by using a single variable: the beta of the market. The fundamental purpose of this research was to validate the CAPM in a modern world, using empiric testing and to assit in the determination of an implied cost of equity for financial services companies in the South African contect of the equity market. One of the pertinent findings of the research was that calculations of market risk premiums are significantly higher than anticipated, and this appeared to be the case with the costs of equity as well. Further studies may well uncover the reasons for this discovery.