4. How do you calculate cost of Equity and how would you arrive at Risk free rate in real world scenario?

Question

Accepted Answer

Cost of equity is calculated using the dividend discount model or the capital asset pricing model. Risk-free rate is determined by analyzing government bond yields.

Cost of equity can be calculated using the dividend discount model (DDM) or the capital asset pricing model (CAPM)
DDM calculates the cost of equity by discounting the expected future dividends
CAPM calculates the cost of equity by considering the risk-free rate, market risk premium, and beta of the stock
Risk-free rate is typically determined by analyzing government bond yields
In real-world scenarios, risk-free rate can be obtained by looking at the yield of government bonds with similar maturity as the investment
For example, if the investment has a 10-year time horizon, the risk-free rate can be determined by analyzing the yield of 10-year government bonds

4. How do you calculate cost of Equity and how would you arrive at Risk free rate in real world scenario?

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