CHAPTER 3

COST OF CAPITAL
 1. INTRODUCTION
• The cost of capital is the cost of using the funds of creditors and owners.
• Creating value requires investing in capital projects that provide a return
greater than the project’s cost of capital.
- When we view the firm as a whole, the firm creates value when it provides a
return greater than its cost of capital.
• Estimating the cost of capital is challenging.
- We must estimate it because it cannot be observed.
- We must make a number of assumptions.
- For a given project, a firm’s financial manager must estimate its cost of
capital.

2
 2. COST OF CAPITAL
• The cost of capital is the rate of return that the suppliers of capital—
bondholders and owners—require as compensation for their contributions of
capital.
- This cost reflects the opportunity costs of the suppliers of capital.
• The cost of capital is a marginal cost: the cost of raising additional capital.
• The weighted average cost of capital (WACC) is the cost of raising additional
capital, with the weights representing the proportion of each source of financing
that is used.
- Also known as the marginal cost of capital (MCC).

3
 WACC
WACC = wdrd (1  t) + wprp + were (3-1)

where
wd is the proportion of debt that the company uses when it raises new funds
rd is the before-tax marginal cost of debt
t is the company’s marginal tax rate
wp is the proportion of preferred stock the company uses when it raises new
funds
rp is the marginal cost of preferred stock
we is the proportion of equity that the company uses when it raises new
funds
re is the marginal cost of equity

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 EXAMPLE: WACC
Suppose the Widget Company has a capital structure composed of the following,
in billions:

Debt €10
Common equity €40

If the before-tax cost of debt is 9%, the required rate of return on equity is 15%,
and the marginal tax rate is 30%, what is Widget’s weighted average cost of
capital?

Solution:
WACC = [(0.20)(0.09)(1 – 0.30)] + [(0.8)(0.15)]
= 0.0126 + 0.120
= 0.1325, or 13.25%

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 EXAMPLE: WACC
Interpretation:
When the Widget Company raises €1 more of capital, it will raise this capital in
the proportions of 20% debt and 80% equity, and its cost will be 13.25%.

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 HOW TO CALCULATE THE COST OF DEBT

• To calculate its cost of debt, a company needs to figure out

the total amount of interest it is paying on each of its debts
for the year. Then, it divides this number by the total of all of
its debt. The quotient is its cost of debt.

• For example, say a company has a $1 million loan with a 5%

interest rate and a $200,000 loan with a 6% rate. It has also
issued bonds worth $2 million at a 7% rate. The interest on
the first two loans is $50,000 and $12,000, respectively, and
the interest on the bonds equates to $140,000. The total
interest for the year is $202,000. As the total debt is $3.2
million, the company's cost of debt is 6.31%.

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 TAXES AND THE COST OF CAPITAL
• Interest on debt is tax deductible; therefore, the cost of debt must be adjusted
to reflect this deductibility.
- We multiple the before-tax cost of debt (rd) by the factor (1 – t), with t as the
marginal tax rate.
- Thus, rd × (1  t) is the after-tax cost of debt.
• Payments to owners are not tax deductible, so the required rate of return on
equity (whether preferred or common) is the cost of capital.

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 HOW TO CALCULATE THE COST OF DEBT AFTER
TAXES
• To calculate after-tax cost of debt, subtract a company's effective tax
rate from 1, and multiply the difference by its cost of debt. Do not use
the company's marginal tax rate; rather, add together the company's
state and federal tax rate to ascertain its effective tax rate.
• For example, if a company's only debt is a bond it has issued with a
5% rate, its pre-tax cost of debt is 5%. If its tax rate is 40%, the
difference between 100% and 40% is 60%, and 60% of 5% is 3%.
The after-tax cost of debt is 3%.
• The rationale behind this calculation is based on the tax savings the
company receives from claiming its interest as a business expense.
To continue with the above example, imagine the company has
issued $100,000 in bonds at a 5% rate. Its annual interest payments
are $5,000. It claims this amount as an expense, and this lowers the
company's income on paper by $5,000. As the company pays a 40%
tax rate, it saves $2,000 in taxes by writing off its interest. As a
result, the company only pays $3,000 on its debt. This equates to a
3% interest rate on its debt.
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 WEIGHTS OF THE WEIGHTED AVERAGE
• The weights should reflect how the company will raise additional capital.
• Ideally, we would like to know the company’s target capital structure, which is
the capital structure that is the company’s goal, but we cannot observe this
goal.
• Alternatives
- Assess the market value of the company’s capital structure components.
- If there has been a noticeable trend in the firm's capital structure, the analyst
may want to incorporate this trend into his estimate of the firm's target capital
structure. For example, if a firm has been reducing its proportion of debt
financing each year for two or three years, the analyst may wish to use a
weight on debt that is lower than the firm's current weight on debt in
constructing the firm's target capital structure.
- Use capital structures of comparable companies (e.g., weighted average of
comparables’ capital structure).

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11
 APPLYING THE COST OF CAPITAL TO CAPITAL
BUDGETING AND SECURITY VALUATION
• The investment opportunity schedule (IOS) is a representation of the
returns on investments.
• We assume that the IOS is downward sloping: the more a company invests,
the lower the additional opportunities.
- That is, the company will invest in the highest-returning investments first,
followed by lower-yielding investments as more capital is available to invest.
• The marginal cost of capital (MCC) schedule is the representation of the
costs of raising additional capital.
- We generally assume that the MCC is upward sloping: the more funds a
company raises, the greater the cost.

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 OPTIMAL INVESTMENT DECISION
Marginal cost of capital Investment opportunity schedule

Cost
or
Return

Optimal
Capital
Budget

Amount of New Capital

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 WHAT IS AN 'OPTIMAL CAPITAL STRUCTURE

• An optimal capital structure is the best debt-to-equity ratio

for a firm that maximizes its value. The optimal capital
structure for a company is one that offers a balance
between the ideal debt-to-equity range and minimizes the
firm's cost of capital. In theory, debt financing generally
offers the lowest cost of capital due to its tax deductibility;
however, it is rarely the optimal structure since a
company's risk generally increases as debt increases.

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 USING THE MCC IN CAPITAL
BUDGETING AND ANALYSIS
• The WACC is the marginal cost for additional funds and, hence, additional
investments.
• In capital budgeting
- We use the WACC, adjusted for project-specific risk, to calculate the net
present value (NPV).
- Using a company’s overall WACC in evaluating a capital project assumes
that the project has risk similar to the average project of the company.
• In analysis
- Analysts can use the WACC in valuing the company by discounting cash
flows to the firm.

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3. COSTS OF THE DIFFERENT
SOURCES OF CAPITAL
Costs of
Capital

Cost of Cost of
Cost of Debt Preferred Common
Equity Equity

Return on
Yield to Capital Asset
Preferred
Maturity Pricing Model
Stock

Variations Dividend
Debt Rating because of Discount
Callability, etc. Model

Bond Yield
plus Risk
Premium

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 THE COST OF DEBT
Alternative approaches
1. Yield-to-maturity approach: Calculate the yield to maturity on the
company’s current debt. Yield to maturity (YTM) is the total return
anticipated on a bond if the bond is held until the end of its lifetime. Yield to
maturity is considered a long-term bond yield, but is expressed as an
annual rate. In other words, it is the internal rate of return of an investment
in a bond if the investor holds the bond until maturity and if all payments are
made as scheduled.
2. Debt-rating approach: Use yields on comparably rated bonds with
maturities similar to what the company has outstanding.

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FIGURE 1: MOODY\'S AND STANDARD & POOR\'S DEBT
RATING SYSTEMS

• Moody\'sS&P Definition Notes

• Aaa AAA Highest Rating Available Investment Grade
• Aa AA Very High Quality Investment Grade
• A A High Quality Investment Grade
• Baa BBB Medium Risk Minimum Investment
• Ba BB Low Quality/High Risk Below Investment Grade
• B B Very Speculative Below Investment Grade
• Caa CCC Substantial Risk Below Investment Grade
• Ca CC Poor Quality/Highest Risk Below Investment Grade
• C D In Default Below Investment Grade

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 EXAMPLE: COST OF DEBT
Yield-to-Maturity Approach Debt-Rating Approach
Consider a company that has $100 Consider a company that has
million of debt outstanding that has a nontraded $100 million of debt
coupon rate of 5%, 10 years to outstanding that has a debt-rating of
maturity, and is quoted at $98. What is AA. The yield on AA debt is currently
the after-tax cost of debt if the 6.2%. What is the after-tax cost of
marginal tax rate is 40%? Assume debt if the marginal tax rate is 40%?
semi-annual interest.

Solution:
Solution: kd( I - t) rd = 0.062 (1 – 0.4) = 3.72%
rd = 0.0526 (1 – 0.4) = 3.156%
The cost of debt capital is 3.72%
The cost of debt capital is 3.156%

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 WHAT IS YIELD TO MATURITY
• A yield curve is a line that plots the
interest rates, at a set point in time,
of bonds having equal credit quality
but differing maturity dates. The
most frequently reported yield curve
compares the three-month, two-year,
five-year and 30-year U.S. Treasury
debt. This yield curve is used as a
benchmark for other debt in the
market, such as mortgage rates or
bank lending rates, and it is also
used to predict changes in economic
output and growth.

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 TYPES OF 'YIELD CURVE'

• The shape of the yield curve gives an idea of future interest rate
changes and economic activity. There are three main types of yield
curve shapes: normal, inverted and flat (or humped). A normal yield
curve is one in which longer maturity bonds have a higher yield
compared to shorter-term bonds due to the risks associated with time.
An inverted yield curve is one in which the shorter-term yields are
higher than the longer-term yields, which can be a sign of upcoming
recession. In a flat or humped yield curve, the shorter- and longer-term
yields are very close to each other, which is also a predictor of an
economic transition.

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 ISSUES IN ESTIMATING THE COST OF DEBT
• The cost of floating-rate debt is difficult because the cost depends not only on
current rates but also on future rates.
- Possible approach: Use current term structure to estimate future rates.
• Option-like features affect the cost of debt.
- If the company already has debt with embedded options similar to what it
may issue, then we can use the yield on current debt.
- If the company is expected to alter the embedded options, then we would
need to estimate the yield on the debt with embedded options.
• Nonrated debt makes it difficult to determine the yield on similarly yielding debt
if the company’s debt is not traded.
- Possible remedy: Estimate rating by using financial ratios.
• Leases are a form of debt, but there is no yield to maturity.
- Estimate by using the yield on other debt of the company.

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 THE COST OF PREFERRED STOCK
The cost of preferred stock that is noncallable and nonconvertible is based on
the perpetuity formula:
→ (3-3)

Problem
Suppose a company has preferred stock outstanding that has a dividend of
$1.25 per share and a price of $20. What is the company’s cost of preferred
equity?

Solution

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 THE COST OF EQUITY
Methods of estimating the cost of equity:
1. Capital asset pricing model
2. Dividend discount model
3. Bond yield plus risk premium

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 USING THE CAPM TO ESTIMATE THE
COST OF EQUITY
The capital asset pricing model (CAPM) states that the expected return on
equity, E(Ri) , is the sum of the risk-free rate of interest, RF, and a premium for
bearing market risk, bi [E(RM) – RF]:

E(Ri) = RF + bi [E(RM) – RF] (3-4)

where
bi is the return sensitivity of stock i to changes in the market return.
The beta coefficient is a measure of a stock's volatility, or risk,
versus that of the market; the market's volatility is conventionally
set to 1, so if a = m, then βa = βm = 1
E(RM) is the expected return on the market
E(RM) – RF is the expected market risk premium or equity risk premium
(ERP)

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 The capital asset pricing model approach

• Step 1: Estimate the risk-free rate, RFR. Yields on default risk-

free debt such as U.S. Treasury notes are usually used. The most
appropriate maturity to choose is one that is close to the useful life
of the project.

• Step 2: Estimate the stock's beta, {3. This is the stock's risk
measure.

• Step 3: Estimate the expected rate of return on the market

• Step 4: Use the capital asset pricing

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EXAMPLE: COST OF EQUITY USING THE CAPM
Problem:
If the risk-free rate is 3%, the expected market risk premium is 5%, and the
company’s stock beta is 1.2, what is the company’s cost of equity?

Solution:
Cost of equity = 0.03 + (1.2 × 0.05) = 0.03 + 0.06 = 0.09, or 9%

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 ALTERNATIVES TO THE CAPM
• Alternative models may be used to capture expected returns to risk factors not
incorporated in the CAPM. For example, we can use a factor model to estimate the
cost of equity:
E(Ri) = RF + bi11 + bi22 + … + βijj (3-5)
where
βij = stock i’s sensitivity to changes in the jth factor

j = the expected risk premium for the jth factor

• We can also use the historical equity risk premium approach, which requires
estimating the average annual return over a historical period. The equation for the
equity risk premium, then, is a simple reworking of the CAPM:

• Equity Risk Premium = Ra - Rf = βa (Rm - Rf)

Issues:
- Level of risk of stocks may change.
- Risk aversion of investors may change.
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 USING THE DIVIDEND VALUATION MODEL TO
ESTIMATE THE COST OF EQUITY
• The dividend discount model (DDM) assumes that the value of a stock today
is the present value of all future dividends, discounted at the required rate of
return.
• Assuming a constant growth in dividends:

which we can rearrange to solve for the required rate of return:

(3-6)
• We can estimate the growth rate, g, by using third-party (analyst) estimates of
the company’s dividend growth or estimating the company’s sustainable
growth.
• The sustainable growth is the product of the return on equity (ROE) and the
retention rate (1 minus the dividend payout ratio, or ):
g = (retention rate)(return on equity) = (1 - pay-out rate)(ROE)
or
ROE

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 USING THE DDM TO ESTIMATE THE
COST OF EQUITY
Problem
Suppose the Gadget Company has a current dividend of £2 per share. The
current price of a share of Gadget Company stock is £40. The Gadget Company
has a dividend payout of 20% and an expected return on equity of 12%. What is
the cost of Gadget common equity?

Solution
Using the dividend payout and the return on equity, we calculate g:
× 0.12 = 0.96, or 9.6%
Then we insert g into the required rate of return formula:
0.0548 + 0.096 = 0.1508, or 15.08%
If Gadget raises new common equity capital, its cost is 15.08%.

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 USING THE BOND YIELD PLUS RISK PREMIUM
APPROACH TO ESTIMATING THE COST OF EQUITY
• The bond yield plus risk premium approach requires adding a premium to a
company’s yield on its debt:
re = rd + Risk premium (3-8)

- This approach is based on the idea that the equity of the company is riskier
than its debt, but the cost of these sources move in tandem.

- Determine the bond yield. This is the effective interest on a company's long-
term debt.

- Determine the risk premium. The risk premium is the amount over the risk-
free rate an investment makes. The risk premium is a general estimate
usually ranging between 5 percent to 7 percent.

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 4. TOPICS IN COST OF CAPITAL ESTIMATION
• Estimating a project’s beta
• Estimating country-risk premiums
• Using an upward-sloping marginal cost of capital schedule
• Dealing with flotation costs

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 PROJECT BETAS
Issues in estimating a beta:
• Judgment is applied in estimating a company’s beta regarding the estimation
period, the periodicity of the return interval, the appropriate market index, the
use of a smoothing technique, and adjustments for small company stocks.
(When data collected over time displays random variation, smoothing
techniques can be used to reduce or cancel the effect of these variations in
order to get better forecasts such as moving average).
• If a company is not publicly traded or if we are estimating a project’s beta, then
we need to look at the risk of the company or project and use comparables.
• When selecting a comparable for the estimation of a project beta, we ideally
would like to find a company with a single line of business, and that line of
business matches that of the project.
- This ideal comparable is a pure play.
- We use the beta of the comparable company to estimate an asset beta (beta
reflecting only business risk) and then use it for the subject project or
company.
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 LEVERING AND UN-LEVERING BETA
• The act of "un-levering" beta is simply subtracting the impact of debt obligations of a
company before evaluating an investment's risk. Un-levered beta is considered useful,
because it helps show a firm's equity risk compared with the overall market, as the
unrealized benefits of debt are removed from the equation. Un-levered beta is
synonymous with "asset beta.“
• To determine the risk of a company without debt, we need to un-lever the
beta (i.e. remove the debt impact).
• To do this you look up the beta for a group of comparable companies within
the same industry, un-lever each one, take the median of the set, and then
lever it based on your company’s capital structure.
• Then you use this Levered Beta in the cost of equity calculation.
• To un-lever beta, remove the comparable capital structure from the beta to arrive at the
asset beta, which reflects the company’s business risk:
(3-9)

To lever the beta, adjust for the project’s financial risk:

(3-10)

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 Beta Vs. Unlevered Beta

• Unlevered beta (a.k.a. Asset Beta) is the beta of a company

without the impact of debt. It is also known as the volatility of returns
for a company, without taking into account its financial leverage. It
compares the risk of an unlevered company to the risk of the market.
It is also commonly referred to as “asset beta”
because the volatility of a company without any
leverage is the result of only its assets. Let’s compare
that to levered beta.
• Conversely, levered beta (or “equity beta”) is a measurement
that compares the volatility of returns a company’s stock against
those of the broader market. In other words, it’s a measure
of risk. Equity beta allows investors to gauge how
sensitive a security might be to macro-market risks. For
example, a company with a beta of 1.5 has returns that are 150% as
volatile as the market it’s being compared to.
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 CONTD.
• If the unlevered beta is positive, investors will want to invest in it
when prices are expected to rise. If the unlevered beta calculation is
negative, investors will want to invest in it when prices are expected
to fall.
• Asset beta is used to measure the risk of a security
minus the company’s debt.
• It is best to use asset beta when either a company or an investor
wants to measure a company’s performance in relation to the market
without the impact of a company’s debt.

Copyright © 2013 CFA Institute 36

 SUMMARY OF STEPS IN THE CALCULATION

1. Locate suitable proxy companies.

2. Determine the equity betas of the proxy companies, their gearings and tax
rates.
3. Un-gear the proxy equity betas to obtain asset betas. DE-GEAR the beta
means remove the financial risk element. Now you only have the business
risk element left. This now reflects the risk of the industry that the company
operates in, i.e. this is the asset or un-geared beta.
4. Calculate an average asset beta.
5. Re-gear the asset beta. It is used to incorporate the Financial Risk of the new
Project
6. Use the CAPM to calculate a project-specific cost of equity.
(If the new project is to be in the SAME industry then all you have to do is RE-
GEAR the asset or industry beta calculated above using the debt equity mix of
the new project).

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 ISSUES INVOLVED IN ESTIMATING THE BETA
• While the method is theoretically correct, there are several
challenging issues involved in estimating the beta of the comparable
(or any) company's equity:
• Beta is estimated using historical returns data. The estimate is
sensitive to the length of time used and the frequency (daily, weekly,
etc.) of the data.
• The estimate is affected by which index is chosen to represent the
market return.
• Betas are believed to revert toward 1 over time, and the estimate
may need to be adjusted for this tendency.
• Estimates of beta for small-capitalization firms may need to be
adjusted upward to reflect risk inherent in small firms that is not
captured by the usual estimation methods.

Copyright © 2013 CFA Institute 38

 EXAMPLE: LEVERING AND UN-LEVERING
BETAS
Problem
Consider the following information for the Whatsit Project and its comparable,
Thatsit Company:
Whatsit Project Thatsit Company
Debt €10 €100
Equity €40 €200
Equity beta ? 1.4

What is the asset beta and equity beta for the Whatsit Project based on the
comparable company information and a tax rate of 40% for both companies?
Solution
basset = 1.4 {1 [1 + (1 – 0.4)(100  200)]} = 1.4 × 0.76923 = 1.0769
bequity = 1.0769 [1 + (1 – 0.4)(10  40)] = 1.0769 × 1.15 = 1.2384
The beta of the Whatsit Project is 1.2384

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 COUNTRY RISK PREMIUM
• The country risk premium is the additional risk premium associated with doing
business in a developing nation.
• The additional premium, added to the required rate of return estimated from the
CAPM, is the country equity premium, or the country spread. Using the CAPM
to estimate the cost of equity is problematic in developing countries because beta
does not adequately capture country risk. To reflect the increased risk associated
with investing in a developing country, a country risk premium is added to the
market risk premium when using the CAPM.
• To estimate the country risk premium:
- Use the sovereign yield spread, which is the difference in government bond
yields. (The sovereign yield spread is the difference between a government
bond yield in the country being analysed, denominated in the currency of the
developed country, and the Treasury bond yield on a similar maturity bond in the
developed country)
- Adjust the sovereign yield spread by a factor that is the ratio of the
- annualized standard deviation of the developing nation’s equity index to the
- annualized standard deviation of the sovereign bond market in the developed
market currency. 40
 EXAMPLE: COUNTRY RISK PREMIUM
• Robert Rodriguez, an analyst with Omni Corporation, is estimating a country
risk premium to include in his estimate of the cost of equity for a project Omni
is starting in Venezuela. Rodriguez has compiled the following information for
his analysis:
• Venezuelan U.S. dollar-denominated 10-year government bond yield = 8.6%.
• 10-year U.S. Treasury bond yield = 4.8%.
• Annualized standard deviation of Venezuelan stock index = 32%.
• Annualized standard deviation of Venezuelan U.S. dollar-denominated on 10-
year government bond = 22%.
• Project beta = 1.25.
• Expected market return = 10.4%.
• Risk-free rate = 4.2%.
• Calculate the country risk premium and the cost of equity for Omni's
Venezuelan project?

Copyright © 2013 CFA Institute 41

 THE UPWARD-SLOPING MARGINAL
COST OF CAPITAL SCHEDULE
• The marginal cost of capital schedule may slope upward, with higher costs for raising
more capital. The marginal cost of capital (MCC) is the cost of the last new
dollar of capital a firm raises. As a firm raises more and more capital, the
costs of different sources of financing will increase. For example, as a firm
raises additional debt, the cost of debt will rise to account for the additional
financial risk.
• The cost of capital may increase for many reasons, including:
- Bond covenants restricting additional bond issuance with same rights as theie.
- Deviations from target capital schedule because capital is not raised in small
increments but rather may be raised periodically to minimize issuance costs.
- Also, issuing new equity is more expensive than using retained earnings due to
flotation costs. The bottom line is that raising additional capital results in an increase
in the WACC.
- Break points occur any time the cost of one of the components of the company's
WACC changes. Once the firm reaches this breakpoint, if they choose to raise
additional capital their WACC increases
- The point at which the cost of capital changes is the break point:
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43
44
 FLOTATION COSTS
• A flotation cost is the investment banking fee associated with issuing securities.
• There are two treatments for flotation costs:
1. Adjust the price of the security in the return calculation by the flotation cost, or
2. Adjust the NPV of the project for the monetary cost of flotation.
• Adjusting the NPV is preferred because the flotation costs occur immediately
rather than affect the company throughout the life of the project.

Problem
Suppose a company has a project with an NPV of $100 million. If the company
issues $1 billion of equity to finance this project and the flotation costs are 1.2%,
what is the NPV after adjusting for flotation costs?
Solution
NPV = $100 million – $12 million = $88 million

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 EXAMPLE

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 ANSWER

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Copyright © 2013 CFA Institute 48
 5. SUMMARY
• The weighted average cost of capital is a weighted average of the after-tax
marginal costs of each source of capital.
• An analyst uses the WACC in valuation. For example, the WACC is used to
value a project using the net present value method.
• The before-tax cost of debt is generally estimated by means of one of two
methods: yield to maturity or bond rating.
• The yield-to-maturity method of estimating the before-tax cost of debt uses the
familiar bond valuation equation.
• Because interest payments are generally tax deductible, the after-tax cost is
the true, effective cost of debt to the company.
• The cost of preferred stock is the preferred stock dividend divided by the
current preferred stock price.
• The cost of equity is the rate of return required by a company’s common
stockholders. We estimate this cost using the CAPM (or its variants) or the
dividend discount method.

Copyright © 2013 CFA Institute 49

 SUMMARY (CONTINUED)
• The CAPM is the approach most commonly used to calculate the cost of
common stock.
• When estimating the cost of equity capital using the CAPM when we do not
have publicly traded equity, we may be able to use the pure-play method, in
which we estimate the unlevered beta for a company with similar business risk
and then lever that beta to reflect the financial risk of the project or company.
• It is often the case that country and foreign exchange risk are diversified so
that we can use the estimated  in the CAPM analysis. However, in the case in
which these risks cannot be diversified away, we can adjust our measure of
systematic risk by a country equity premium to reflect this nondiversified risk:
• The dividend discount model approach is an alternative approach to calculating
the cost of equity.

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 SUMMARY (CONTINUED)
• We can estimate the growth rate in the dividend discount model by using
published forecasts of analysts or by estimating the sustainable growth rate:
• In estimating the cost of equity, an alternative to the CAPM and dividend
discount approaches is the bond yield plus risk premium approach.
• The marginal cost of capital schedule is an illustration of the cost of funds for
different amounts of new capital raised.
• Flotation costs are costs incurred in the process of raising additional capital.
The preferred method of including these costs in the analysis is as an initial
cash flow in the valuation analysis.
• Survey evidence indicates that the CAPM method is the most popular method
used by companies in estimating the cost of equity.

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