In this paper we discuss the required return on equity for a simple project with a finite life. To determine a project's cost of equity, it is quite common to use Modigliani and Miller's ‘Proposition II' (1963). However, if the assumptions of MM do not hold, ‘Proposition II' will lead to...

The yield to maturity (YTM) or internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments. Almost all finance textbooks state the following conditioning assumptions: (i) that the coupon payments can be reinvested at a rate equal to...

The capital asset pricing model (CAPM) receives both criticism and widespread adoption by practitioners and academics as the weighted average cost of capital (WACC) equity component. This study introduces two new costs of equity measures to address CAPM criticisms and provide new perspective on...

A growing body of literature in accounting and finance relies on implied cost of equity (COE) measures. Such measures are sensitive to assumptions about terminal earnings growth rates. In this paper we develop a new COE measure that is more accurate than existing measures because it incorporates...

We use earnings forecasts from a cross-sectional model to proxy for cash flow expectations and estimate the implied cost of capital (ICC) for a large sample of firms over 1968-2008. The earnings forecasts generated by the cross-sectional model are superior to analysts' forecasts in terms of...

We evaluate the influence of measurement error in analysts' forecasts on the accuracy of implied cost of capital estimates from various implementations of the ‘implied cost of capital' approach, and develop corrections for the measurement error. We document predictable error in the implied...

When Capital Asset pricing Model (CAPM) is considered as valid asset pricing theory, Security Market Line (SML) is supposed to give ex-ante returns for the single period investment horizon. Since the required returns should be same as the cost of equity (discount rates) in efficient markets, SML...

We compare the accuracy of cost of equity estimates based on leading factor models to two simple alternatives: the asset mean and the market mean. The market mean proves to be a serious competitor to traditional implementations of factor models even if the underlying factor model is true....

Which trading strategies differentiate skilled mutual fund managers from their unsuccessful peers? This study provides evidence for a positive association between holdings' implied cost of capital (ICC) and future fund performance. Consistent with large transaction costs of ICC-based investments...

The WACC is just the rate at which the Free Cash Flows must be discounted to obtain the same result as in the valuation using Equity Cash Flows discounted at the required return to equity (Ke).The WACC is neither a cost nor a required return: it is a weighted average of a cost and a required...