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Beta is a multiple used to adjust up (Beta > 1) the equity risk premium if a stock is expected to be riskier than the market, and down (Beta < 1) if the stock is lower risk than the market. What Impacts the Capital Asset Pricing Model? These risks can be reduced through the diversification of a portfolio.
In DCF analysis, the WeightedAverageCost of Capital (WACC), representing the average return required by all stakeholders, is commonly used as the discount rate. The discount rate must be carefully chosen to reflect unique company risks and characteristics, and also changes in economic conditions.
Cost of Equity and Capital: The Terminal Growth Rate is used to calculate the cost of equity in the Dividend Discount Model (DDM) and the cost of capital in the WeightedAverageCost of Capital (WACC) formula.
Weightaveragecost of capital (WACC) is a calculation of a firm’s cost of capital which includes all sources of capital such as common stocks, preferred stocks, and bonds. A firm uses a mix of equity and debt to minimize the cost of capital. The formula is expressed in the following.
d is the discount rate (which is usually the weightedaveragecost of capital (WACC), r in our previous example). Ce = Cost of Equity. Rf = Risk-free Rate. Rm – Rf) = Equity MarketRisk Premium. Cp = Cost of Equity Premium. And you need three numbers to do this. . B = Beta. (Rm
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