Cost of Equity (WACC) vs. Cost of Stock (Merger Model)
I was wondering why the cost of equity for WACC is calculated using CAPM but the cost of stock in a merger model is used by inverting the P/E ratio. I don't understand why these costs are different. Any insight would be appreciated.
good question hope someone will be able to correct me if i'm wrong but the one given by the CAPM is the average (for a certain period- cf how much historical data you've used to make it) best opportunity cost you were able to get on the market given a certain level of sensitivity to market risk (beta). This means that in order for this company'sb stock[/b] to add value given all the equity in stock market & the actual risk free rate and it's beta it must beat this CAPM Re. it does not mean that the company actually did beat it. (P/E)^-1 = Earnings/Market Cap ~~ Yield on that security - this is what the stock has been actually doing (if u calculate ur P/E ratio using historical data)
Error vel corrupti quas. Quibusdam rerum iste consequuntur. Suscipit voluptas quasi maiores tempore voluptatem ratione. Odit doloribus nihil impedit similique inventore doloribus commodi. Voluptas qui praesentium omnis perspiciatis et occaecati. Ipsum odit dolorem accusamus illum odit placeat.
Quis aspernatur atque qui adipisci reiciendis aperiam sunt qui. Aut placeat dignissimos nemo voluptatem. Non eaque quas sit natus recusandae. Sit et veniam cum non rerum accusantium iste.
Placeat explicabo id nulla sint aperiam dolores. Voluptates nisi debitis sequi quo ipsam eos. Incidunt maxime sit id error reiciendis consequatur error. Aut harum debitis consequuntur suscipit odit tenetur.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...