Practice Question
In a DCF analysis, the cost of capital is usually calculated using the Capital Asset Pricing Model (CAPM).
Answer +
TRUE
Step-by-step solutions +
The cost of capital represents the minimum return that an investment must generate to justify its risk.
In Discounted Cash Flow (DCF) analysis, the cost of equity is often derived using the Capital Asset Pricing Model (CAPM), which is calculated as:
Cost of Equity = Risk-Free Rate + Beta × Market Risk Premium
CAPM provides a systematic way to estimate the expected return on equity based on market conditions and the company's specific risk (beta), making it a core input in DCF valuations.
In Discounted Cash Flow (DCF) analysis, the cost of equity is often derived using the Capital Asset Pricing Model (CAPM), which is calculated as:
Cost of Equity = Risk-Free Rate + Beta × Market Risk Premium
CAPM provides a systematic way to estimate the expected return on equity based on market conditions and the company's specific risk (beta), making it a core input in DCF valuations.