If we deduct ‘risk free return’ from ‘market return’ and multiply it with ‘beta factor’ and again add ‘risk free return’, the resultant figure will be –Options :NilRisk premiumCost of equityWACC of the firm
Question
If we deduct ‘risk free return’ from ‘market return’ and multiply it with ‘beta factor’ and again add ‘risk free return’, the resultant figure will be –Options :NilRisk premiumCost of equityWACC of the firm
Solution
The resultant figure will be the Cost of Equity.
Here's the step-by-step explanation:
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The difference between the market return and the risk-free return is known as the market risk premium.
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When you multiply the market risk premium by the beta factor, you get the equity risk premium. The beta factor measures the volatility of an investment (like a stock) compared to the market as a whole.
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When you add back the risk-free return to the equity risk premium, you get the cost of equity.
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. It is used by companies to evaluate whether a capital project is worth the investment of funds.
So, the correct answer is Cost of Equity.
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