CAPM

CAPM answers what return a shareholder requires to hold this equity rather than something else. It starts from the return available with no risk, then adds compensation for the risk actually taken, scaled to how much of it this particular business carries.

The risk free rate should match the currency and roughly the duration of the cash flows, so a long dated euro forecast uses a long dated German government yield rather than a short one. The equity risk premium is the extra return investors demand for holding equities over government bonds, estimated either from long run history or backed out of current prices.

Beta is the only company specific input and does the work of saying how volatile this business is relative to the market. A beta of 1.2 says 20% more volatile, which is a statement about the equity and therefore about both the operations and the leverage.

Its weaknesses are worth knowing: beta is estimated from historic prices that may not describe the future, it captures only market risk and ignores company specific risk on the assumption investors diversify it away, and it produces implausibly low numbers for a private company with no observable beta at all.