An evaluation of airline beta values and their application in calculating the cost of equity capital.

Abstract

This paper focuses on the calculation of the cost of equity capital in a sample of airlines, in comparison to industry-calculated values. The approach usually taken is to apply the Capital Asset Pricing Model to airline stock prices and market indices. The research shows that the calculated b values are sensitive to the precise methodology and calculations used. Further, the low regression model fits indicate the Capital Asset Pricing Model may not be the most suitable model for b value calculations. The emerging b values are lower than expected, and possible causes of this are discussed.