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What asset pricing model does the WACC use to compute equity capital costs? In this model,...

What asset pricing model does the WACC use to compute equity capital costs? In this model, what does the market risk premium and the Beta, respectively, seek to address? Using this model that you described, what would be the cost of equity if the Beta is 0? Is a Beta of -1 even possible, and if it is, what would it suggest?

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Answer #1

Ans ) Capital Asset Pricing model (CAPM) is used by WACC to compute capital costs.

Market Risk Premiun: It tells how good market is performed over risk free asset. It is the difference between rate of market and risk free asset.

Beta: It is a measure of systematic risk. It tells about stock's market risk against the market.

Cost of equity will be equal to risk free rate of return is beta is equal to zero. It tells that equity is replica of risk free asset.

Yes beta of -1 is possible it tells that stock is contrarian stock. That is stock will move opposite to market. If market return will be negative then this will generate positive return and vice versa.

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