Cost of Companys Own Funds

The normal method of calculation for company funds is to use the capital asset pricing model (CAPM). This was developed by share analysts keen to have a defence against accusations of negligence in selecting shares for clients as a means of assessing the real value of any share, in the form of risk and desirability. It essentially demonstrates one version of the direct proportionality between risk and return. 

In its graphical form, risk is measured along the horizontal axis by a factor beta , related to the volatility of the price of the share, resulting 

The justification for this model is the fact that any share that sits well above the line (i.e. having a relatively high yield) for any reason will appear attractive to the market, investors will buy it, its price will rise as a result of this demand and its yield will thus fall back to the market line. Conversely, any share that is well below the line will appear unattractive, investors will sell, the price will fall and the yield will rise. 

This model is so successful that large companies can use a similar method to decide which parts of the company are doing well, and which should be sold. 

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