J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

Cost of EquityThe cost of equity, K e , is an estimation of our expected return on stock orsecurities for the current year. We used the CAPM model to calculate areasonable approximation of J. C. Penney’s cost of equity. In or to do this wehad to gather the necessary values to compute the CAPM model, which consistof the risk-free rate, our company’s beta, and the expected market return.Before we could place all of our results into the equation, we had to run aregression analysis to calculate our firm’s beta. Using the St. Louis FederalReserve website, we were able to find the past Treasury bill rates, which gave alogical estimate of our risk-free and market return rates.After running several regressions over different periods using the 72, 60,48, 36, and 24 months, our results varied across the board. Looking at allperiods we covered the 3-month, 6-month, 2 year, 5 year, and 10 year T-billrates. We found the 3-month gave us the best results. We came to thisconclusion because this period had the highest R 2 of 19.13 percent, whichrepresents the level of explainable movement based on the benchmark index.This inherently led to our beta being calculated at 1.1306, with a risk-free rate of4.87 percent. Using the documented returns from the S&P 500 over the past 17years, we found a long-run average to be 12.6 percent. We used the long-runreturn in order to take into effect all fluctuations of the market, and determinedit to be the best for our estimations. Using the CAPM model, we were able toinsert our findings and calculate our K e to be 8.41 percent.110