CAPM - Equity Cost of Capital
Let's say the share has a beta of 2 and as a result, you get a return on equity of 6%. how does this work in practice, do managers etc. ultimately align their investments to achieve this average benchmark of 6% or if they don't, how is CAPM working in a context of a fundamental analysis?
Excuse my english, I'm from India.
Not sure how you end up at a cost of equity of 6% with a Beta of 2%? For US it's something like: Rf: somewhere around 1-2% Levered beta: 2.0 MRP: 5-6% Cost of equity: 1.5% + 2*5.5% = 12.5%
Investors will use CAPM to determine WACC and then do a DCF on the listed companies. If a company is trading below it's DCF value there will be more demand for the shares, resulting in a higher share price.
the cost of capital is whatever my MD says it is
it is always 10%
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