Vol. 4, Issue 7, Part D (2018)

Abstract
The Capital Asset Pricing Model (CAPM) is generally used in calculating cost of equity. CAPM relies on chronicled data to project beta which is then used to predict the future returns. Many researchers have accentuated deviations with CAPM and have recommended various models that take these deviations. This study reviews the Market Derived Capital Asset Pricing Model (MCPM), which uses option premium prices and featured volatility to estimate future risk premium which then is considered while calculating cost of equity. The featured volatility accentuates market risk expectation. This is considered important for corporate officials who are required to constitute an appropriate barrier rate while taking decisions regarding capital budgeting. Also, investors need to calculate expected future returns based on ex-ante risk of an investment. The study investigates the comparison of cost of equity estimated by using CAPM and MCPM.