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)
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