Learning Outcome Statements

1. Return concepts

a. distinguish among realized holding period return, expected holding period return, required return, return from convergence of price to intrinsic value, discount rate, and internal rate of return;

2. The equity risk premium

b. calculate and interpret an equity risk premium using historical and forward-looking estimation approaches;

3. The required return on equity - the CAPM approach

c. estimate the required return on an equity investment using the capital asset pricing model, the Fama-French model, the Pastor-Stambaugh model, macroeconomic multifactor models, and the build-up method (e.g., bond yield plus risk premium);

d. explain beta estimation for public companies, thinly traded public companies, and nonpublic companies;

e. describe strengths and weaknesses of methods used to estimate the required return on an equity investment;

f. explain international considerations in required return estimation;

4. The required return on equity - other models

c. estimate the required return on an equity investment using the capital asset pricing model, the Fama-French model, the Pastor-Stambaugh model, macroeconomic multifactor models, and the build-up method (e.g., bond yield plus risk premium);

d. explain beta estimation for public companies, thinly traded public companies, and nonpublic companies;

e. describe strengths and weaknesses of methods used to estimate the required return on an equity investment;

f. explain international considerations in required return estimation;

5. The weighted average cost of capital

g. explain and calculate the weighted average cost of capital for a company;

6. Discount rate selection in relation to cash flows

h. evaluate the appropriateness of using a particular rate of return as a discount rate, given a description of the cash flow to be discounted and other relevant facts.