AuthorTopic: confused about cost of capital
@2014-04-26 12:39:15
specifically for calculation of WACC.

i am seeing some problems with the forumla to use (risk free rate) + (beta) (equity risk premium - risk free rate) and then some without the 2nd RFR. (risk free rate) + (beta)(equity risk premium)

it seems the first is for CAPM and the 2nd is just for calculating req return? is this correct or am i confused???
@2014-04-30 07:29:25
There is a difference between the equity risk premium and the return on the market. Equity risk premium is the difference between the return on the market and the risk free rate.

Therefore the first equation you wrote is wrong. It should be: risk free rate + beta*(return on the market - risk free rate)

Remember that:
equity risk premium = return on the market - risk free rate.

CFA Discussion Topic: confused about cost of capital

To post a new topic or reply to a topic, please log in or register for a free user account.

I was very pleased with your notes and question bank. I especially like the mock exams because it helped to pull everything together.
Martin Rockenfeldt

Martin Rockenfeldt