How to calculate capm in excel. e. How to calculate capm in excel

 
eHow to calculate capm in excel  To calculate the intrinsic value of a stock, you estimate a company’s future cash flow, discount it by the compounded inflation/interest rate, and divide the result by the number of shares outstanding

Industry Name: Number of firms: Beta : D/E Ratio: Effective Tax rate: Unlevered beta: Cash/Firm value: Unlevered beta corrected for cash: HiLo Risk: Standard deviation of equity3. . 2. To find the expected return of Tesla we use the CAPM equation modified for Excel syntax as follows: 1. Let’s do Apple as an example: The risk-free rate as of today (July 24,. Calculate WACC (Weighted Average Cost of Capital) in Excel 2020. βportfolio =cov(Rp,Rm)/σm β p o r t f o l i o = c o v ( R p, R m) / σ m. Calculate the Beta coefficient. Example #3. In this video, we look at the capital asset pricing model - CAPM for short. R f. Sharpe Ratio Formula. We provide empirical support for our arguments by developing a method for estimating firms’ project CAPM betas and project returns. Step 1: Theoretically RFR is risk free return is the interest rate what an investor expects with zero Risk. Capital Market Line - CML: The capital market line (CML) appears in the capital asset pricing model to depict the rates of return for efficient portfolios subject to the risk level ( standard. 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. 7. Then your percent change formula takes this form: = (C2-B2)/B2. First formula to calculate CAPM. 66 years. Then we can calculate the required return of the portfolio using the CAPM formula. paid its shareholders dividends of $1. It calculates the percentage of a company’s market price of a share that is paid to shareholders in the form of dividends. Here are the steps to follow when using this WACC calculator: First, enter the Total Equity which is a monetary value. We go over (in Microsoft Excel) how to arrive at the Risk-Free Rate, how to calculate the Beta of a. However, it is up to Mr. Input the values into the CAPM formula. 04 + 2/5 * 0. The Logic of the CAPM The CAPM builds on the model of portfolio choice developed by Harrythe CAPM value of a firm knowing the firm beta, expected return on the market, and the risk-free rate. Practically any investments you take, it at least carries a low risk. 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: Here is the step by step approach for calculating Required Return. The formula for calculating the cash conversion cycle sums up the days inventory outstanding and days sales outstanding, and then subtracts the days payable outstanding. Rf = refers to the risk-free rate of interest. P (F8:F108) =SLOPE (E8:E108,F8:F108) You could also calculate beta simply by plotting. E r = R f + [B i x (R m – R rf)] E r = expected. General Motors Company has an expected return of 11%. Based on this calculation, the the investor decides whether to put the money in it or not. We also provide a Regression Line calculator with a downloadable excel. a. * I save the CETES dataset as. Step 3: Insert the formula =1+ (1-B6)*B7 in cell B8 to calculate the denominator of the Unlevered Beta Formula. CAPM - Capital Asset Pricing Model Cost of Equity = R f + B(R m - R f) Formula Inputs. You can use both the CAPM and the dividend discount methods to determine the cost of equity. 2 percent. Calculate the market returns. read more. How To Calculate? Let us look at some of the formulas used to calculate risk premiums in the financial market. 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. Using Correlation Method – Example #1. The unlevered beta of listed companies is available at many stock market databases. The greater the absolute value of the beta coefficient, the stronger the impact will be. You need to provide the three inputs, i. There are three methods commonly used to calculate cost of equity: the capital asset pricing model (CAPM), the dividend discount mode (DDM) and bond yield plus risk premium approach. format period %tm. 2 percent. 0562, or 5. CAPM Beta Calculation in Excel. Download the Free Template. " In cell G33, cell F32 is shown as a. The Capital Asset Pricingn Model (CAPM) is a formula used to determine whether investing in a partiular asset is profitable. 9%. Step 4 – Calculate the Fractional Daily Return. At the center of the CAPM is the concept of risk (volatility of returns) and reward (rate of returns). 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. The cost of equity is the perceptional cost of investing equity capital in a business. At the same point in time, the thirty-year treasury bond rate in the United States. 0% – 3. where r is the fund's return rate, R f is the risk-free return rate, and K m is the return of the index. Here, the cost of debt is $640,000. On the other hand, The effective interest rate takes the effect of compounding into account. To calculate the cost of retained earnings, we can use the price of the stock, the dividend paid by the stock, and the capital gain also called the growth rate of the dividends paid by the stock. Step 1: We first need to calculate the debt-equity ratio. I stumpled upon an exercise in an investments book: The data below describe a three-stock financial market that satisfies the single-index model. D = Debt market value. 80% of your funds are invested in A. 132, or 13. The Capital Asset Pricing Model and Risk Premiums. To do this, just take the price from today minus the price. Pre-tax cash flows don’t just inflate post-tax cash flows by (1 – tax rate). Input Bond Assumptions in Excel. Beta is a measure of the volatility , or systematic risk , of a security or a portfolio in comparison to the market as a whole. CAPM is the abbreviation of capital asset pricing model, which is used to compute the expected return of an asset, which is in function with the risk of an asset. This risk-free rate should be inflation-adjusted. Calculating after-tax WACC (weighted average cost of capital) in Excel is very common in corporate finance (both undergraduate finance and MBA finance). r e – cost of equity. In this example we'll use the CAPM: Step 2: Calculate the cost of equity. To get readers comfortable using the attached WACC Calculator, we will calculate the WACC of Walmart as an example . data” in case we wish to export and save the data. =COVARIANCE. Given the average S&P 500 return of 11. The budget at completion (BAC) is the total amount budgeted for the project, in this case $60,000. Enter the alternative “risk free” investment in cell A1. Check out our website - We have just launched our Excel for. Specifying the correct model is an iterative process where you fit a model, check the results, and possibly modify it. ROIC Formula. What is capital asset pricing model with example. 5%. 69, and consecutively multiply it by 6% for each year. The expected three-month return on the mutual fund. Cost of Equity is the rate of return a shareholder requires for investing equity into a business. read more or the government bonds. Then, divide the cash flow for the period by the result. The CAPM (Capital Asset Pricing Model) determines if an investment is reasonably priced. 65 = 0. 0%. If we put the steps from the prior section together, the formula for calculating the ratio is as follows: Sharpe Ratio = (Rp − Rf) ÷ σp. The DDM is based on the assumption that the company’s dividends represent the company’s cash flows to its shareholders. The CAPM analysis needs a series of steps to assess the risks of investing in a stock. For equity, there is no such direct cost available. Relevance and Uses of Market Risk Premium Formula. S. The capital asset pricing model (CAPM) is used to calculate expected returns given the cost of capital and risk of assets. Cost of Equity (Ke) = DPS/MPS + r. (Erm – Rf) is the market risk premium, which outlines how much more. Abnormal returns are measured as the difference between the actual returns that investors earn on an asset and the expected returns that are usually predicted using the CAPM equation. Calculate the individual present values. #1- Covariance/Variance Method. It estimates the cost of common equity by summing the next period dividend yield and the dividend growth rate. 2021 = $199,956. Alpha Calculator. How to Calculate Equity Risk Premium? The equity risk premium (or the “market risk premium”) is equal to the difference between the rate of return received from riskier equity investments (e. CAPM Calculator Excel / Formula. Cost of equity (required rate of return) is one of the most fundamental concepts in corporate finance. #excel #optimization #solverPortfolio Optimization in Excel*Solver Model starts at 8:27Please SUBSCRIBE:a previous post, we covered how to calculate CAPM beta for our usual portfolio consisting of: + SPY (S&P500 fund) weighted 25% + EFA (a non-US equities fund) weighted 25% + IJS (a small-cap value fund) weighted 20% + EEM (an emerging-mkts fund) weighted 20% + AGG (a bond fund) weighted 10% Today, we will move on to visualizing. Real world example of the the CAPM using Microsoft Excel and regression analysis. The. Enter this same formula in subsequent cells. There are two ways of calculating beta with Excel – the first uses the variance and covariance functions, while the second uses the slope function. e. The Capital Asset Pricing Model. This can be done by using the CAPM (Capital Asset Pricing Model) or Dividend Capitalization Model (if the company pays out a dividend). The stock market has been very volatile in the last few years. 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. Resize the cell so that all the label text is visible. Market Risk Premium = 15% – 4%; Market Risk Premium = 11% Most of the time, we need to base our expected return on the historical figures. begin by outlining the logic of the CAPM, focusing on its predictions about risk and expected return. Enter the Cost of Debt which is also a percentage value. * I calculate the continuously compounded return from the simple returns:. 63 as the DPS in Year 6. Therefore, the WACC can be viewed as a break-even return that determines the profitability of a project or an. In the graph above, we plotted excess stock returns over excess market returns to find the line of best fit. n = number of periods included. Cost of Equity Example in Excel (CAPM Approach) Step 1: Find the RFR (risk-free rate) of the market. A second part will then concentrate on the Capital-Asset-Pricing-Method (CAPM) and its assumptions, implications and drawbacks. Now we’ll need to calculate the EPS for every year that we hold XOM, given our growth rate. Rf = refers to the risk-free rate of interest. How to calculate the sharpe ratio for investments in Excel, definition and formula explained. To begin calculating NPV, it's important to calculate the individual present values for each period, such as each month, quarter or year. Let’s assume the stock is Tesla. The formula for calculating the yield to maturity (YTM) is as follows. . Understand the Capital Asset Pricing Model. The expected return of General Motors is calculated by entering the formula "=C2+C3* (C4-C2)" into cell C5. market risk) and then buckets everything else as idiosyncratic (i. t = corporate taxation rate. Step 2: Next, calculate the average return for both stocks: Step 3: After calculating the average, we take a difference between the returns ABC, return, and ABC’s average return similarly between XYZ and XYZ’s return average return. Market risk premium is equal to the slope of the security. Cash Flow Cash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. Capital Asset Pricing Model, and Cost of Equity. It is basically used to calculate the stock’s expected stock return. Calculating CAPM Beta. Risk/Reward Ratio = $19 / $53. Method #1 – Dividend Discount Model. 4 % Explanation. Our certifications have different requirements based on the number of PDUs for maintenance. Now that each monthly return is in column C, you can calculate the average of the monthly returns in cell C39 and the standard deviation of returns in cell C40. The CAPM helps investors to figure out the expected return on a particular investment. The term CAPM stands for “Capital Asset Pricing Model” and is used to measure the cost of equity (ke), or expected rate of return, on a particular security or portfolio. So, in order to calculate CAPM, you need to use the formula in excel;. 8* (12% – 4%) E r = 18. This formula essentially estimates the equity returns of a stock based on the market returns and the company’s correlation to the market. 65 = 0. Use Excel, Yahoo Finance from the US Federal Reserve to calculate the. 1. There are two ways the SIM can be expressed, either in " raw returns " (aka ordinary returns) or in " excess returns . The CAPM formula is: Cost of Equity (Ke) = rf + β (Rm – Rf) Solve for the asset return using the CAPM formula: Risk-free rate + (beta_(market return-risk-free rate). 41%. To calculate the value of a stock using CAPM, multiply the volatility , known as " beta ," by the additional compensation for incurring risk, known as the "Market Risk. Security Market Line. Step 1: We first need to calculate the debt-equity ratio. Calculating NPV Using Excel. The data for the Fama-French risk factors is available on Kenneth. The portfolio beta is denoted by β. Step 1: Put the returns of your portfolio and the benchmark index into Excel, and calculate the average returns. The corresponding formulae are given below. Here we discuss how to calculate the Regression Line along with practical examples. The number to six decimal places (0. Methods and steps for CAPM assessment. How do you calculate CAPM in Excel? Solve for the asset return using the CAPM formula: Risk-free rate + (beta_(market return-risk-free rate). Interest incurred by company on the cost of debt is admissible expense for tax purpose, therefore cost of debt is multiplied by factor (1. Find out more about the capital asset pricing model (CAPM) and the formula for calculating it in Microsoft Excel. 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. CAPM formula = B 1 + B 3 ∗ (B 2 − B 1) ext{B}_{1}+ ext{B}_{3}*( ext{B}_{2}- ext{B}_{1)} B 1 + B 3 ∗ (B 2 − B 1) 6: The expected return of an investment (ER i ext{ER}_ ext{i} ER i. 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. The stock has a beta of 2. 40%. We provide empirical support for our arguments by developing a method for estimating firms’ project CAPM betas and project returns. . In this video we will know how to Calculate CAPM Alpha & CAPM Beta, Jensen Alpha for Stock / Strategy in excelHow to Install the Data Analysis ToolPak in Mi. Hence, we’ve got the Alpha value. 3. About Press Copyright Contact us Creators Advertise Developers Terms Privacy Policy & Safety How YouTube works Test new features NFL Sunday Ticket Press Copyright. As a core part of corporate finance and investment banking, CAPM looks at the relationship between the investment’s riskiness and the inherent risks of the market at large. Specific premium forms can also be calculated separately, known as the market risk premium formula and Risk Premium formula on a Stock using CAPM Using CAPM The Capital Asset Pricing Model (CAPM) defines the expected return from a portfolio of various securities with varying degrees. The following inputs are required to be entered by the investor: Symbol of the asset: Enter the ticker under which the security in your Portfolio is traded. For instance, type "Expected Return (Re)" in cell A1. 1%. In this video, we go over how to calculate CAPM (Capital Asset Pricing Model). Calculate the Beta coefficient. 5th Step: Calculate Jensen’s Alpha. To calculate COE, first determine the market rate of return, the risk-free rate of return and the beta of the stock in question. Where = risk free return, = constant, = asset CAPM beta coefficient, = asset and market returns covariance, = market. Excel, Yahoo Finance, and 90 Day T-bill data from the US Federal Reserve to calculate the expected return of a s. Taylor. Excel, Yahoo Finance, and 90 Day T-bill data from the US Federal Reserve to calculate the expected return of a s. E (Rm) = refers to the expected return of the. You can also easily calculate the CAPM using the formula in the template provided. The above calculation is done before the period under consideration starts, and it. The book Value per share of Jagriti Group of Companies is $47. The market rate of return is simply. The CAPM formula requires the rate. The cost of equity is calculated using the Capital Asset Pricing Model (CAPM) which equates rates of return to volatility (risk vs reward). 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. 14. From the figure, we can see that Alpha is 3. 5%] Expected return = 11. Now, if we look at the averaging the total debt over the last several years, we get: 2022 = $154,679. For Investment 1. Enter this into your spreadsheet in cell A4 as "=A1+ (A2_ (A3-A1))" to calculate the expected return for your investment. Calculating the correlation of stock A with stock B. CAPM Calculator Excel / Formula. weighted average cost of capital formula of Company A = 3/5 * 0. The market risk premium is part of the Capital Asset Pricing Model (CAPM. In t. R f. This is a supplement to the investment courses I teach. What is the Fama-French Three-factor Model? The Fama-French Three-factor Model is an extension of the Capital Asset Pricing Model (CAPM). 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. It shows that the expected return on a security is equal to the risk-free return plus a risk premium, which is. What is capital asset pricing model. Cost of debt = 3. Therefore, the effective discount rate for David in this case is 6. Dividend Per Share Dividends per share are calculated by dividing the total amount of dividends paid out by the company over a year by the total number of average shares held. Step 3: Calculate Nominal Risk-Free Rate. The table also includes standard deviation which is the next data component needed when building out the efficient frontier. Find the risk free rate. CAPM Formula. stocks Beta of the stock Expected return = risk free rate + (beta x market return premium)The NIFTY 50 index is calculated using a process called the free-float market capitalization-weighted method. Our findings justify the continued use of the CAPM by firms in spite of the mounting evidenceExample Calculation with Walmart. R f = Risk-free rate of return. . Download the excel file here: How to calculate. Calculate the price changes percentage in each day. 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. 0396 = 3. more. 2 percent. This is a supplement to the investment courses I teach. =C5-C11. S. About Press Copyright Contact us Creators Advertise Developers Terms Privacy Policy & Safety How YouTube works Test new features NFL Sunday Ticket Press Copyright. 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. Course Curriculum: Objective. $$ {\beta}_ {portfolio} = cov (R_p, R_m)/\sigma_m $$. Here, we will do the same example of the CAPM formula in Excel. And the risk-free rate on a treasury bond is 2%. The portfolio beta is denoted by β. The first approach is to look at the current yield to maturity or YTM of a company’s debt. 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. Beta is a measure of the volatility , or systematic risk , of a security or a portfolio in comparison to the market as a whole. 2. As an example, a company has a beta of 0. 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. The above calculation is done before the period under consideration starts, and it is only an estimation. In this video on CAPM Beta, we look at the nuts and bolts of CAPM Beta. The general equation of this type of line is. Cost of Equity = Risk Free Rate + Beta x Risk Premium. Step 4: Next, calculate the expected rate of return by using risk-free rate (step 1), market risk premium (step 2) and portfolio beta (step 3) as shown below. Calculating the Cost of Equity. CAPM: Here is the step by step approach for calculating Required Return. Ensure that the sum of probabilities equals 100%. The CAPM analysis needs a series of steps to assess the risks of investing in a stock. Calculating COE With Excel To calculate COE, first determine the market rate of return, the risk-free rate of return and the beta of the stock in question. β → Beta. 064; Required Rate of Return = 6. * I create monthly variable for the months:. Put the formula = (C2 / A2) in cell E2. The company has stock shares that trade on the S&P 500. Stock beta: You can calculate the stock beta manually using the formula below, or use the beta found on websites like Bloomberg and Yahoo Finance. Calculating the Cost of Equity. The next step is to calculate the percentage returns for both the stock and the index. This risk-free rate should be inflation-adjusted. The Capital Asset Pricing Model (CAPM) describes the relationship between the expected return and risk on any asset or portfolio. It proves to be a prerequisite for analyzing. The equation for its expected return is as follows: Ep = w1E1 + w2E2 + w3E3. The Weighted average cost of capital (WACC) is the average rate that a firm is expected to pay to all creditors, owners, and other capital providers. These inputs can be inserted in the following formula. That's the % complete figure in the simple formula. 4. 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. = the stock’s market risk (how sensitive the stock is to fluctuating in the market ) 04/18/2016 10:24:19. In this article, I will show you how to calculate and interpret the capital asset pricing model (CAPM). Finally, enter the last percentage value with is the. So over time you can see the impact of a dollar (1. Let’s say you’re trying to calculate the cost of equity for an online computer retailer. The difference between the nominal and effective rates widens as the compounding periods increase. Then, we can divide the $2. e. The formula you require is already in the post and as you have named the function the same as the formula (CAPM), then add it to the function. 4. Calculate the market returns. Beta, the risk-free rate, and CAPM. I review the definitions of realized return as well as normal and abnormal return. . 4. DCF Formula in Excel. 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). 9%. The unlevered cost of capital is the implied rate of return a company expects to earn on its assets, without the effect of debt. It is basically used to calculate the stock’s expected stock return. 63 DPS by (6. It is used as a measure of risk and is an integral part of the Capital Asset Pricing Model ( CAPM ). 9, the risk-free rate is 1 percent and the expected return on the. I provide a short explanation of the CAPM first, but you can just scroll down to the calculator if you already. Capital asset pricing model CAPM formula notation. It is flawed as far as it relies on risk and returns distributions, the behavior of other investors, and some fundamentals of the market, that do not exist in the same form in reality. . Real world example of the the CAPM using Microsoft Excel and regression analysis. This is a quick tutorial on how to estimate the Fama-French 3 Factor Model (FF3) in Excel. In the example, this results in a CAPM of 0. 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. CAPM suggests that a stock’s expected return is equal to the risk-free rate, plus beta multiplied by the market risk premium. . The Capital Asset Pricing Model (CAPM) The cost of equity, Ke, comes from the CAPM. Select a spreadsheet cell and type the column label for the expected return. Click "Line" in the Graph section you will see your Security Market Line. 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. Learn how to calculate Beta on Microsoft Excel with this step-by-step tutorial! This simple, yet easy to understand video provides you with the ability to ca. CAPM is calculated according to the following formula: Where: Ra = Expected return on a security Rrf = Risk-free rate Ba = Beta of the security Rm = Expected return of the. 2 percent. To calculate the percent difference between two numbers correctly, carry out these steps. This Alpha Calculator will compute the value of alpha based on the Capital Asset Pricing Model. Rf = the risk-free rate of return. 69, and consecutively multiply it by 6% for each year. CAPM Formula. Rf = Risk-Free Rate. Calculate the beta of a stock from its historical data. Although the concepts of the CAPM can appear complex, the application of the model is straightforward. E r = R f + [B i x (R m – R rf)] E r = expected return of investment; R f = risk free rate; B i – beta of investment; R m = Expected return on the. Next, enter the Cost of Equity which is a. Re = Rf + β * (Rm. r D – cost of debt. About Press Copyright Contact us Creators Advertise Developers Terms Privacy Policy & Safety How YouTube works Test new features NFL Sunday Ticket Press Copyright. CAPM Formula with its components. 16:14 Lecture 05 Mean-Variance Analysis and CAPM Eco 525: Financial Economics I Slide 05-6 Overview • Simple CAPM with quadratic utility functions (derived from state-price beta model) • Mean-variance analysis – Portfolio Theory (Portfolio frontier, efficient frontier,. MPS = Market Price per Share. Follow me on Instagram: @simranpal_s1nghNo-commission platforms for investing:💵 Robinhood (use the link and we both get a free stock): to Calculate CAPM in Excel. Step by Step Beta Calculation. 98%. Alpha of the mutual fund = Actual rate of return – An expected rate of return. i = annual interest rate. Below is the formula for the cost of equity: Re = Rf + β × (Rm − Rf) Where: 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. 038)^8. Equity risk premium = 5%. g. It is also commonly referred to as “asset beta” because the. To compute the annualized standard deviation, we only need to compute the square root of the annualized variance. Enter your name and email in the form below and download the free template now! The beta (β) of an investment security (i. The template automatically calculates the security's expected return using the CAPM formula. 8* (12% – 4%) E r = 18. The risk-free rate is the current rate of return on. Calculating beta with CAPM. =$C$3+(C9*($C$4-$C$3)) This translates to. Ivan Kitov. Then, calculate the beta of the portfolio using a weighted average of all the securities. It is flawed as far as it relies on risk and returns distributions, the behavior of other investors, and some fundamentals of the market, that do not exist in the same form in reality. Step 3: The next step is to calculate the portfolio Beta, which will be used to calculate the expected returns using CAPM. Beta compares the risk of the asset to the market, so it is a risk that, even with diversification, will not go away. Rd = cost of debt. Step 3.