Question

Cost of equity capital can be calculated by ____________.

• A. Dividend approach
• B. Capital asset pricing model approach
• C. Both (a) and (b)
• D. None of the above

Answer 1

The correct option is C Both (a) and (b)

CAPM takes into account the riskiness of an investment relative to the market. The model is less exact due to the estimates made in the calculation (because it uses historical information).

CAPM Formula:

E(Ri) = Rf + βi * [E(Rm) – Rf]

Where:

E(Ri) = Expected return on asset i

Rf = Risk-free rate of return

βi = Beta of asset i

E(Rm) = Expected market return.