Dividend Discount Model = Intrinsic Value = Sum of Present Value of Dividends + Present Value of Stock Sale Price. Capital Asset Pricing Model (CAPM) is a model that analysts use to measure risk and returns. Real world example of the the CAPM using Microsoft Excel and regression analysis. Capital asset pricing model CAPM formula notation. . Enter your name and email in the form below and download the free template now! The Capital Asset Pricing Model (CAPM) describes the relationship between expected return and risk of investing in a security. Figure 16. The CAPM model can be used to calculate the cost of equity or cost of debt. The CAPM formula requires the rate. The stock has a beta of 2. CAPM, Diversification, & Using Excel to Calculate Betas The Capital Asset Pricing Model (CAPM ) • Equilibrium model that underlies all modern financial theory • Derived using principles of diversification with simplified assumptions • Markowitz, Sharpe, Lintner and Mossin are researchers credited with its development (early 1970’s) • Basic. Enter this same formula in subsequent cells. How to Calculate Beta In Excel - All 3 Methods (Regression, Slope & Covariance)Subscribe!What is BetaA stock that swings more than the market over time has a. It is the minimum amount of money that an investor can expect to earn if they put their money into any form of project or investment. Step 5 – Calculate Beta – Three Methods. Step 3: The next step is to calculate the portfolio Beta, which will be used to calculate the expected returns using CAPM. Some cash flows do not incur a tax charge, and there may be tax losses to consider and timing issues. To do so, you can use the formula =((Cell2-Cell1)/Cell1) *100, where cell 1 refers to the previous period data point, and cell 2 refers to a current period data point. Click "Line" in the Graph section you will see your Security Market Line. DCF Calculator Excel Template. where Re is the expected return of the asset, Rf is the risk-free rate of return, and Rm is the expected return of the market. K c is the risk-adjusted discount rate (also known as the Cost of Capital); R f is the rate of a "risk-free" investment, i. Enter the Cost of Debt which is also a percentage value. Last updated: July 14, 2023. The CAPM is often used to calculate the cost of equity (r e ),. The Capital Asset Pricing Model (CAPM) describes the relationship between the expected return and risk on any asset or portfolio. The minimum required rate of return formula for a stock not paying any dividend can be calculated by using the following steps:. The formula for the capital asset pricing model is the risk free rate plus beta times the difference of the return on the market and the risk free rate. How to calculate capital asset pricing model in excel. The Capital Asset Pricing Model (CAPM) helps to calculate investment risk and what return on investment an investor should expect. Solution: Step 1: Calculation of Er of Portfolio. The market risk premium is part of the Capital Asset Pricing Model (CAPM. Calculating the correlation of stock A with stock B. Note that, except for alpha, this is the equation for CAPM - that is, the beta you get from Sharpe's derivation of equilibrium prices is essentially the. (rm – rf) → Equity Risk Premium (ERP) CAPM Simple Example. 12 trillion. Press "Calculate" to obtain expected return, variance, and standard deviation. Where: w D – weight of debt. Returns are all the earnings acquired after taxes but before interest is paid. Expected rate of return = Risk-free rate of return + β * (Benchmark return – Risk-free rate of return) = 4% + 1. The stock market has been very volatile in the last few years. Cost of Debt = Interest Expense (1- Tax Rate) Cost of Debt = $800,000 (1-20%) Cost of Debt = $800,000 (0. R i – Return Expectation of each scenario; P i – Probability of the return in that scenario; i – Possible Scenarios extending from 1 to n Examples of Expected Return Formula (With Excel Template) Let’s take an example to understand the calculation of the Expected Return formula in a better manner. gen m_rf = ln(1 + m_Rf). 064; Required Rate of Return = 6. 3. 1. The market risk premium is computed by the difference of the expected price return and the risk-free rate which is the part of the Capital asset. 1) Capital asset pricing model (CAPM) The CAPM is a very popular model as it captures the expected return and the risk of volatility (systematic risk) in those returns. 9%. WACC Formula. Calculating CAPM Beta. Example #3. Capital Asset Pricing Model (CAPM). The beta formula is used in the CAPM model to calculate the Cost of Equity as shown below –. The following entry explains a basic principle of finance, the so-called efficient frontier and thus serves as a gentle introduction into one area of finance: “portfolio theory” using R. The calculator uses the following formula to calculate the expected return of a security (or a portfolio): E (R i) = R f + [ E (R m) − R f ] × β i. 056175) matches what we have on the Returns tab. In our example, the value of Beta is 0. Security Market Line. t – corporate tax rate. P (F8:F108) =SLOPE (E8:E108,F8:F108) You could also calculate beta simply by plotting. Then, divide the cash flow for the period by the result. Now by using the below formula, we can calculate Book Value Per Share: Book Value per Share = (Shareholder’s Equity – Preferred Equity) / Total Outstanding Common Shares. In the graph above, we plotted excess stock returns over excess market returns to find the line of best fit. From the figure, we can see that Alpha is 3. To calculate the expected return on assets, you must utilize the CAPM formula: Expected return = risk-free rate + volatility/beta * (market return - risk-free rate). It is the rate of return where the investor’s money is not at Risk-like treasury bills Treasury Bills Treasury Bills (T-Bills) are investment vehicles that allow investors to lend money to the government. The template automatically calculates the security's expected return using the CAPM formula. In this video, I show you how to calculate a stock's expected return using the capital asset pricing model. The required rate of return is also known as the minimum acceptable rate of return. What is the CAPM formula? CAPM Formula. Cost of debt = 3. Enter the stock’s beta value in cell A2. Beta, the risk-free rate, and CAPM. Beta is a measure of the volatility , or systematic risk , of a security or a portfolio in comparison to the market as a whole. Example 7. 21. It is the return shareholders require based on the company’s equity riskiness. It is used as a measure of risk and is an integral part of the Capital Asset Pricing Model ( CAPM ). A CAPM Excel template is an excel spreadsheet that can be used to calculate a security's expected return given its risk level. Step 2: Calculate the Real Rate using the formula. It calculates the percentage of a company’s market price of a share that is paid to shareholders in the form of dividends. Asset pricing models consist of estimating asset expected return through its expected. A standardized beta compares the strength of the effect of each independent variable to the dependent variable. If you want to calculate your return for a specific time period rather than over the entire life of the portfolio, enter the value of the account on the starting date as the first contribution. Step 2 – Sort the Dates & Adjusted Closing Prices Step 3 – Prepare a single sheet of Stock Prices Data &. Let’s say you’re trying to calculate the cost of equity for an online computer retailer. D 1 = Expected dividend per share to be paid next year; k = Investor’s required rate of return g = Expected dividend growth rate There are basically two forms of the model: Stable model: As per the model, the dividends are assumed to grow at the same rate. The Capital Asset Pricing Model, or CAPM, calculates the value of a security based on the expected return relative to the risk investors incur by investing in that security. As an example, a company has a beta of 0. It finds applications in various finance models that include the CAPM method, revenue forecasting, etc. Interest incurred by company on the cost of debt is admissible expense for tax purpose, therefore cost of debt is multiplied by factor (1. Y is the return rate of a “safe” investment, such as. The calculator uses the following formula to calculate the expected return of a security (or a portfolio): E(R i) = R f + [ E(R m) − R f] × β i. Ivan Kitov. Step by Step Beta Calculation. There are different ways to measure risk; the original CAPM defined risk in terms of volatility, as measured by the investment's beta coefficient. Capital Asset Pricing Model - CAPM: The capital asset pricing model (CAPM) is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. (Erm – Rf) is the market risk premium, which outlines how much more. The CAPM formula can be used to calculate the cost of equity, where the formula used is: Cost of Equity = Risk-Free Rate of Return + Beta * (Market Rate of Return - Risk-Free Rate of Return). Below is an Excel β calculator that you can download and use to calculate β on your own. Jensen's Measure: The Jensen's measure is a risk-adjusted performance measure that represents the average return on a portfolio or investment above or below that predicted by the capital asset. Alpha: What It Means in Investing, With Examples. " In cell G33, cell F32 is shown as a. The formula for calculating CAPM is: Expected rate of return (Er) = Rf + β (Erm – Rf) Here is an explanation of each variable: Rf is the risk-free rate. The third step of calculating the WACC in excel is to find the Company's cost of debt using their borrowing rate and effective tax rate. Calculate Expected Rate of Return on a Stock in Excel. 0% – 3. The calculation provided by the CAPM. ‘Cost of Equity Calculator (CAPM Model)’ calculates the cost of equity for a company using the formula stated in the Capital Asset Pricing Model. How to use the calculator: Enter the probability, return on Stock A, and return on Stock B, for each state. Calculate Stock’s Beta using one of the two methods. We've already discussed in our article, Calculating Stock Prices, how the price of a common stock is equal to the discounted value of the expected dividend stream and the end-of-period stock price. $$ {eta}_ {portfolio} = cov (R_p, R_m)/sigma_m $$. Enter this into your spreadsheet in cell A4 as "=A1+ (A2_ (A3-A1))" to calculate the expected return for your investment. . The Capital Asset Pricing Model * Measures risk in terms on non-diversifiable variance * Relates expected returns to this risk measure. Where, DPS = Dividend Per Share. 0%) to arrive at $87. Now we’ll need to calculate the EPS for every year that we hold XOM, given our growth rate. Re = Rf + β * (Rm. 5 * (7% – 4%) Expected Rate of Return= 8. Step 1: Firstly, the return from each investment of the portfolio is determined, which is denoted by r. Quick and easy way to calculate Alpha, Beta and R-Squared We show how to do a regression calculating alpha and beta in CAPM We find that Tesla has a beta of 0. 20 in year one and $1. Let’s break down the answer using the formula from above in the article: Expected return = Risk Free Rate + [Beta x Market Return Premium] Expected return = 2. How to calculate CAPM (capital assets pricing model) in Excel sheet. Find the risk free rate. * Now I indicate Stata that the time variable is period:. Discount Rate is calculated using the formula given below. In finance, the capital asset pricing model (CAPM) is used to determine the appropriate required rate of return of an asset (or a portfolio). So, in order to calculate CAPM, you need to use the formula in excel;. Investors always prefer to have the highest possible rate of return. non-systematic). Expected rate of return = Risk-free rate of return + β * (Benchmark return – Risk-free rate of return) = 4% + 1. 65 = 0. 2. Excel, Yahoo Finance, and 90 Day T-bill data from the US Federal Reserve to calculate the expected return of a s. This gives you the fair value price you should pay for a stock. We go over (in Microsoft Excel) how to arrive at the Risk-Free Rate, how to. The expected return of General Motors is calculated by entering the formula "=C2+C3* (C4-C2)" into cell C5. There are several R code flows to calculate portfolio beta but first let’s have a look at the equation. Therefore, the Calculation of the Alpha of the mutual fund will be as follows –. = the return on risk free investments. 00] + 2. 7 / 20000) + 0. 70 in year two. The total EPS over the holding period of 3 years is simply the EPS in Year 1, 2 and 3 added together. e. Step 2: Compute or locate the beta of each company. The Capital Asset Pricing Model (CAPM) provides a way to calculate the expected return of an investment based on the time value of money and the systematic risk of the asset. To calculate the expected return on assets, you must utilize the CAPM formula: Expected return = risk-free rate + volatility/beta * (market return - risk-free rate). CAPM evolved as a method of measuring systematic risk. The Capital Asset Pricing Model, or CAPM, is a basic theoretical model for determining the expected return on a security or portfolio. The dividend discount model is one of the most basic techniques of absolute stock valuation. In this video, we go over how to calculate CAPM (Capital Asset Pricing Model). Multistage growth model: The above assumption is not realistic as the expected. Methods and steps for CAPM assessment. CAPM Formula. However, we observe that this stock has a positive intercept value after accounting for the risk-free rate. Step 1: Firstly, determine the risk-free rate of return, which is the. In effect, the SML displays the expected return on an individual security at different levels of systematic risk. It suggests that not. How to calculate the sharpe ratio for investments in Excel, definition and formula explained. Find the Cost of Debt Determine the cost of debt (Rd). The market risk premium is part of the Capital Asset Pricing Model (CAPM) which analysts and investors use to calculate the acceptable rate of return for an investment. #1- Covariance/Variance Method. Alpha Defined Alpha is computed in relation to the. Capital Asset Pricing Model - CAPM: The capital asset pricing model (CAPM) is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. Enter your name and email in the form below and download the free template now! The market risk premium is the additional return an investor will receive (or expects to receive) from holding a risky market portfolio instead of risk-free assets. Capital Asset Pricing Model, and Cost of Equity. How to Calculate CAPM in Excel By C. E [ R i T] − R f T = β i × ( E [ R M T] − R f T) β i = E [ R i T] − R f T E. Here, we will do the same example of the CAPM formula in Excel. Where = asset expected return, = expected risk free return, = asset CAPM beta coefficient, = market expected risk premium. P() in excel to perform the above calculations. Calculating percent difference between 2 columns. Suppose you have the last month prices in column B and this month prices in column C. First formula to calculate CAPM. 132, or 13. Define your risk free rate. CAPM Single Factor Model with Excel. The capital asset pricing model is a formula that can be used to calculate an asset’s expected return versus its systematic risk. Solve for the asset return using the CAPM formula: Risk-free rate + (beta_(market return-risk-free rate). Enter this into your spreadsheet in cell A4 as "=A1+ (A2_ (A3-A1))" to calculate the expected return for your investment. Step 2. 1. Then we can calculate the required return of the portfolio using the CAPM formula. This formula can then be copied down the spreadsheet through row C38. 4. The purpose of WACC is to determine the cost of each part of the company’s capital structure based on the proportion of equity, debt, and preferred stock it has. =C6+C7* (C8-C6) After that, type the following formula in cell C12 and hit ENTER to get the value of Alpha. It is basically used to calculate the stock’s expected stock return. To calculate WACC, one multiples the cost of equity by the % of equity in the company’s capital structure, and adds to it the cost of debt multiplied by the % of debt on the company’s structure. Real world example of the the CAPM using Microsoft Excel and regression analysis. One approach to calculating NPV is to use the formula for discounting future cash flows, as is shown in row 6. So: In cell F32, we have "= ROOT (F30). It proves to be a prerequisite for analyzing. It facilitates the computation of security prices by considering the expected rate of return and the cost of capital. ) – CAPM (Intuition) •CAPM – ProjectionsNPV is used to measure the costs and benefits, and ultimately the profitability, of a prospective investment over time. CAPM: Here is the step by step approach for calculating Required Return. The table also includes standard deviation which is the next data component needed when building out the efficient frontier. This generates the slope of the SML line and multiplies it by your stock's beta to generate the expected return of the stock. MarketXLS® completely automates the process of calculating the Efficient frontier using excel to get the optimal portfolios which tend to lie along the efficient frontier. The Fama-French model aims to describe stock returns through three factors: (1) market risk, (2) the outperformance of small-cap companies relative to large-cap companies, and (3) the outperformance of high book-to-market value companies versus low. 98%. Rf = refers to the risk-free rate of interest. Solution: Expected Rate of Return is calculated using the CAPM Formula given below. Highlight the cells from E1 to E3, then choose the "Chart" menu and click on "Line. This assumption—that investors can borrow and lend. 12. The first article in the series introduced the CAPM and its components, showed how the model could be used. What is the Fama-French Three-factor Model? The Fama-French Three-factor Model is an extension of the Capital Asset Pricing Model (CAPM). 3 * (11% – 4%) = 13. The Capital Asset Pricing Model, known as CAPM, serves to elucidate the interplay between risk and anticipated return for investors. CAPM - Capital Asset Pricing Model Cost of Equity = R f + B(R m - R f) Formula Inputs. Step 1: Theoretically RFR is risk free return is the interest rate what an investor expects with zero Risk. In the graph above, we plotted excess stock returns over excess market returns to find the line of best fit. The capital asset pricing model provides a formula that calculates the expected return on a security based on its level of risk. Jensen’s alpha takes into consideration the capital asset pricing model (CAPM) and includes a risk-adjusted component in its calculation. Apply it to determine the risk, return, or the price of an investment. See examples, how to calculateThe formula for calculating Covariance is as follows: Covariance = ∑ (x i – x̄) (y i – ȳ) / (n – 1) Where, x & y = data value of x & y respectively. The next step is to calculate the percentage returns for both the stock and the index. We dive into a quick example and look at how it can be used to help value a stock. DCF Formula =CFt / ( 1 +r)t. Capital Allocation Line - CAL: The capital allocation line (CAL), also known as the capital market link (CML), is a line created on a graph of all possible combinations of risk-free and risky. 5. The capital asset pricing model (CAPM) is an investment theory and model of equity valuation that was proposed by William Sharpe (1964), John Litner (1965), Jack Treynor (1961, 1962), and Jan Mossin (1966), and builds on the "model of portfolio choice" created by Harry Markowitz (1959). I provide a short explanation of the CAPM first, but you can just scroll down to the calculator if you already. Intrinsic Value Formula. " The SIM formula expressed in raw returns is shown below: R i = α i + β i R m + ε i. Given the average S&P 500 return of 11. . CAPM can be used to evaluate the performance of many investments such funds. As a preface for our modeling exercise, we’ll be calculating the cost of debt in Excel using two distinct approaches, but with identical model assumptions. ERi = Rf + βi (ERm −Rf) where: ERi = expected return of investment Rf = risk-free rate βi = beta of the investment (ERm −Rf ) = market risk premium 3. read more. Sharpe Ratio Formula. It is very easy and simple. $$ {\beta}_ {portfolio} = cov (R_p, R_m)/\sigma_m $$. Return is the rate of return on your portfolio or investment being measured. Find out more about the capital asset pricing model (CAPM) and the formula for calculating it in Microsoft Excel. This article is the final one in a series of three, and looks at the theory, advantages, and disadvantages of the CAPM. Variance. To calculate the minimum annual return that we will demand as shareholders, and which we will call “Ke”, the CAPM model will be used (“Capital. In column D, enter the expected return rates of each investment. Step 2 – Calculate EPS Over the Holding Period. CAPM comprises three core components: the risk-free return, the market risk premium, and Beta. 5%. The formula above tells us that the cost of preferred stock is equal to the expected preferred dividend amount in Year 1 divided by the current price of the preferred stock, plus the perpetual growth rate. = the return required by investors on a stock. The DDM is based on the assumption that the company’s dividends represent the company’s cash flows to its shareholders. cash;A further feature of Excel that proves useful is the abil-ity to name ranges of cells. Although the concepts of the CAPM can appear complex, the application of the model is straightforward. 1. An Example Using the data from the covariance matrix above, this section will show how to carry out a CFA in Excel and to calculate parameter estimates and fit statistics. Pre-tax cost of equity = Post-tax cost of equity ÷ (1 – tax rate). Top 3 Formula to Calculate Beta. Let’s say that ABC Corp. Excel, Yahoo Finance, and 90 Day T-bill data from the US Federal Reserve to calculate the expected return of a s. Step 1: We first need to calculate the debt-equity ratio. The CAPM formula is as follows: Ke → Expected Return on Investment. ‘Cost of Equity Calculator (CAPM Model)’ calculates the cost of equity for a company using the formula stated in the Capital Asset Pricing Model. Divide the first difference above by the second difference above. 63 DPS by (6. If you want to calculate your return for a specific time period rather than over the entire life of the portfolio, enter the value of the account on the starting date as the first contribution. CAPM Formula with its components. t = corporate taxation rate. The Beta coefficient represents the slope of the line of best fit for each Re – Rf (y) and Rm – Rf (x) excess return pair. Learn how to compute cost of equity, one of the important input for various financial analytical projects as per the CAPM approach. Interest is the cost of utilizing borrowed money. Discount Rate is calculated using the formula given below. where Re is the expected return of the asset, Rf is the risk-free rate of return, and Rm is the expected return of the market. Upon multiplying the DPS of $2. βi = refers to the beta of security. Below is the formula for the cost of equity:. 3. To find the expected return, plug the variables into the CAPM equation: ra = rf + βa(rm - rf) For example, suppose you estimate that the S&P 500 index will rise 5 percent over the next three months, the risk-free rate for the quarter is 0. Cost of Equity = Risk Free Rate + Beta x Risk Premium. In the first row, enter column labels: • A1: Investment • B1: Gain A • C1: Probability of Gain A • D1: Gain B • E1: Probability of Gain B • F1: Expected Rate of Return. Calculate the cost of equity (Re). 038)^8. i = annual interest rate. What is capital asset pricing model with example. Discount Rate = T * [ (Future Cash Flow / Present Value) 1/t*n – 1] Discount Rate = 2 * [ ($10,000 / $7,600) 1/2*4 – 1] Discount Rate = 6. In t. The calculation of the profit should be undertaken using investment appraisal techniques such as Net Present Value (“NPV”), Internal Rate of Return (“IRR”) and Payback period (“PB”). Taylor. Let’s assume the stock is Tesla. a. The short term rate of China’s government bills is 2. In cell E2, enter the formula = (C2 / A2) to render the weight of the first investment. This enables one to define a matrix and refer to it by name. In this example we'll use the CAPM: Step 2: Calculate the cost of equity. Step 2. format period %tm. Where = risk free return, = constant, = asset CAPM beta coefficient, = asset and market returns covariance, = market. 3. Yield to Maturity (YTM) = [Annual Coupon + (FV – PV) ÷ Number of Compounding Periods)] ÷ [ (FV + PV) ÷ 2] The components of the yield to maturity (YTM) equation consist of the following inputs: Coupon Payment (C) → Determined by the coupon rate of the bond, or. Step 4 – Calculate the Fractional Daily Return. Understand the Capital Asset Pricing Model. DCF Formula in Excel. How to Calculate Alpha and Beta in Excel (Step-by-Step) Without any further delay, we will jump into the stepwise procedure to calculate the alpha and beta in Excel. Now, if we look at the averaging the total debt over the last several years, we get: 2022 = $154,679. This CAPM calculator will allow you to quickly find the expected return on a stock using the CAPM. To begin calculating NPV, it's important to calculate the individual present values for each period, such as each month, quarter or year. The WACC determines the overall cost of the company’s financing. 1%. The value of an investment is calculated by subtracting all current long-term liabilities, those due within the year, from the company. In the context of portfolio management, alpha (α) is defined as the incremental returns from a portfolio of investments, typically consisting of equities, above a certain benchmark return. . Let us start with a short explanation about CAPM. Then, divide the cash flow for the period by the result. Next, enter the Cost of Equity which is a. It is very easy and simple. Current Stock Price = Next year's dividend value ($4)/ rate of return - growth rate of dividend. Examples of Beta Formula. CAPM Formula with its components. 66 years. The CAPM formula is: Cost of Equity (Ke) = rf + β. Intro: (00:00)Sharpe Ratio. Expected Rate of Return. . Hence, we’ve got the Alpha value. Required Rate of Return = (2. Generating the CAPM Variables — As indicated above, the CAPM regression analysis requires us to calculate the “Excess Returns” for each LIC and the “Market Risk Premium”. where: R it = total return of a stock or portfolio i. Firstly and most essentially, we need to understand the theoretical formula of WACC which is calculated as follows: WACC Formula Excel. What does. However, the concepts behind CAPM can help us understand the connection. In this article, I will show you how to calculate and interpret the capital asset pricing model (CAPM). Beta will be calculated using the following formula: β = Covariance(R p,R m)/Variance(R p) Use the formula COVARIANCE. Here, the cost of debt is $640,000. CAPM Formula: E (Ri) = Rf + βi (E (Rm) – Rf) where: E (Ri) = refers to the expected return on the capital asset. 4. You need to provide the three inputs,. 1. It takes inflation and returns into account and features particularly in capital budgeting and investment planning - there’s even a specific Excel function for it. After plugging all of that into our formula, we get the market value of debt of $154,679, equal to the book value. First, you want to set up your Excel. 2 x 5) = 10%The formula for the levered beta can be computed by using the following steps: Step 1: Firstly, figure out the unlevered beta or asset beta of the company. About Press Copyright Contact us Creators Advertise Developers Terms Privacy Policy & Safety How YouTube works Test new features NFL Sunday Ticket Press Copyright. For more information visit Download the Free Template. Click Open in Excel and perform a regression analysis. Check out our website - have just launched our Excel for Beginner's course, helping you harness the power of Excel qui. Example #2. Video of the Day. 10 at the end of 1994. Portfolio beta is equal to the covariance of the portfolio returns and market returns. The difference between the nominal and effective rates widens as the compounding periods increase. Calculate Stock’s Beta using one of the two methods. The formula for risk premium, sometimes referred to as default risk premium, is the return on an investment minus the return that would be earned on a risk free investment. See all valuation resources. Here we discuss how to calculate the Regression Line along with practical examples. As model auditors, we see this formula all of the time, but it is wrong. For Microsoft Corporation. The company has stock shares that trade on the S&P 500. Using the CAPM: E(ri) = Rf + βi (E(rm) – Rf) = 4 + (1. In shorthand this model is expressed as: Return = Rf + Ri + SMB + HML. Here are the steps to follow when using this WACC calculator: First, enter the Total Equity which is a monetary value. Assess the risk-free rate of your asset. Now we can say that Company A has a lesser cost of capital (WACC) than Company B. General Motors Company has an expected return of 11%.