The cost of capital
Article Abstract:
A standard method for calculating the cost of capital has not been found yet. The greatest challenge in estimating the cost of capital is the cost of equity. For instance, the use of the Capital Asset Pricing Model (CAPM) to measure the cost of equity can be difficult because there is no uniform assumption regarding the risk free rate, beta and equity risk premium, which are the elements needed to compute the cost of equity. Because of these, there are those who dismiss the CAPM as being inappropriate and recommend instead the market-derived discount approach. However, the CAPM does have its merits, including the fact that it supports the view that higher risks require higher returns. In applying CAPM to emerging markets, there are three options. They are the modified US dollar-denominated CAPM, local currency CAPM and market derived CAPM.
Publication Name: Journal of General Management
Subject: Business, general
ISSN: 0306-3070
Year: 1999
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Estimating risk premium
Article Abstract:
An alternative to estimate shareholder risk premium using financial growth forecasts is presented. Market risk is conventionally based on historical relationship between share and bond returns to allow shareholders to compensate for the additional risk of making an equity investment. The Capital Asset Pricing Model states that the cost of equity can be calculated from the sum of the risk free rate and the product of beta and the market risk premium. Beta measeures the association between the return on a specific market share and the market as a whole. The market risk premium or the premium over the risk free rate is measured historically. Expectational data, which is a concensus of financial analysts' forecasts of earnings, may be used as an alternative for investor expectations.
Publication Name: Journal of General Management
Subject: Business, general
ISSN: 0306-3070
Year: 1993
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Competitive advantage period
Article Abstract:
Competitive advantage period (CAP) is defined as the timeframe within which a company is estimated to yield returns on incremental investment surpassing its capital cost. Over the years, this concept has been given different monikers, including value growth duration and T. According to Rumelt (1991), several factors are responsible for the variance of profits among different business units thereby resulting in variances in CAP. The most notable factors identified by Rumelt were business unit specific effects and unexplained factors. There are two basic methods for the management of the CAP and terminal value: market implied duration and applying scenario analysis. However, some firms may find that these two may not be applicable to them and use other options.
Publication Name: Journal of General Management
Subject: Business, general
ISSN: 0306-3070
Year: 1997
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