Does CAPM give a nominal or real Ke?
Hi there, I am having a discussion with my collegues about weather the traditional formula of CAPM (RFR+B(Rm-RFR)) gives a real or nominal Ke? Thanks
Hi there, I am having a discussion with my collegues about weather the traditional formula of CAPM (RFR+B(Rm-RFR)) gives a real or nominal Ke? Thanks
Career Resources
Interesting question. Given that you're usually using the yield on the 10yr on a nominal basis, I'd assume that CAPM would return a nominal cost of equity.
Additionally, if CAPM returned a real rate, then in our calculation of WACC we would want to provide real, not nominal, returns to debt investors as well in order to have them on the same basis. Given that we typically just look at after tax cost of debt as it currently stands (or comps as they stand), we're looking at cost of debt that isn't adjusted for inflation. This would imply that cost of equity is on a nominal basis as well.
Officia culpa ipsa possimus et tempora est vero. Recusandae facere necessitatibus molestiae iure eaque quasi reiciendis. Ut dolore rerum molestiae. Est sint ullam veniam consequatur non.
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...