Capm helps in the capital budgeting decisions through the sml which provides the required return for a project.
The capital asset pricing model or CAPM is used to calculate the expected returns which are given the cost of capital as well as the risk of assets. The formula of CAPM requires the rate of return for the general market or the beta value of the stock as well as the risk-free rate to ascertain the cost of capital.
The CAPM formula may be used to calculate the cost of equity ,by using the following given the formula:
Cost of Equity = Risk free rate of return + beta * (market rate of return - risk-free rate of return)
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