Empirical Analysis of the Cost of Equity for Costco Wholesale Corporation Using the CAPM Framework

Junwei Luo

doi:10.6981/FEM.202608_7(8).0010

Authors

Junwei Luo Bayes Business School, City St George's, University of London, London EC1V 0HB, United Kingdom

DOI:

https://doi.org/10.6981/FEM.202608_7(8).0010

Keywords:

Costco; CAPM; Cost of Equity; Beta; Systematic Risk; Empirical Analysis.

Abstract

The cost of equity of Costco Wholesale Corporation (NASDAQ: COST) is estimated empirically. Cost of equity is the cornerstone of modern finance that stipulates expected return required by investors for taking on systematic risk. However, this project quantifies COST’S cost of equity, conducts sensitivity analysis, and crosschecks its results with known benchmarks by utilizing available public information such as Costco’s 5-year beta coefficient, US 10-year Treasury yield, and US market risk premium. Empirical estimates derived from the input assumptions show that Costco’s cost of equity ranges from 8.8% to 9.8%. This result is contextualized by explaining how corporate finance theory applies to Costco’s cost of equity within the framework of the company’s risk structure, business stability, and financial strategy. The conclusion of the study is that CAPM works well as a first-order valuation model, but faces practical challenges that need modifications and fine tuning before it can be used for helpful first-order decision-making.

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