- CFA Exams
- General Forum
- Topic: confused about cost of capital
|Author||Topic: confused about cost of capital|
|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???
|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)
equity risk premium = return on the market - risk free rate.