Pragmatic problems in using beta for managerial finance applications

Any faculty member with experience in teaching managerial finance and investment courses can cite occasional awkward findings by students about required rates of returns. Unfortunately, many times the explanations for such unexpected findings are not as simple as outlier problems in the sample or an offer by a modified version of the model to correct the problem. Our purpose is to explore a broad sample to demonstrate the frequency of cases where Capital Asset Pricing Model (CAPM)-generated marginal costs of equity are less than zero; less than the risk-free rate and less than the company's marginal cost of debt capital. In addition to several robustness checks, the results are very similar with either Internet or calculated betas suggesting that the data used in the analysis does not present unusual characteristics. However, we do not offer further modifications to CAPM or other asset pricing models.