Q. Capital asset pricing model to estimate a project?
CAPM could have been utilized to estimate a project - specific Ke if the project activities were different from that of the company. This could then have been used to compute a project specific WACC.
The process for this would have been as follows.
(i) Find a listed company with activities alike to those of the project.
(ii) Find its beta factor in a book of betas.
(iii) Regulate for gearing if necessary.
(iv) Put in to the CAPM equation.
Project Ke = rf + ß (rm - rf)
Note
rf could be calculated by looking at yields on government gilts.
rm could be computed by looking at movements on the FT all shares index.
The model's strengths and weaknesses comprise the following.