Expected return (cost of equity)
Hi guys,
I have a question regarding expected returns on stocks. Expected returns on stocks are calculated using the CAPM model. In the DCF model to value a stock cash flows to equity holders are discounted by this cost of equity (via the wacc). If you calculate the enterprise value using a dcf model, subtract the debt and add the firm's cash you get the equity value of the firm. My question: the cash of the firm is not yet invested and could not earn the expected/ required return. However, the expected return of the stock is for the whole equity value. So, does the firm's cash lower the expected return or is there an assumption that the cash the firm holds, gets reinvested?
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