Question

Cash of equity capital is rather disfficikt to estimate because

Answer 1

Explanation:

The cost of equity capital is the minimum rate of return that a company must earn on the equity financed portion of its investments in order to maintain the market price of the equity share at the current level. The cost of equity capital is rather difficult to estimate because there is no definite commitment on the part of the company to pay dividends. However, there are various approaches for computing the cost of equity capital. They are:

The SML approach or CAPM model

This is a popular approach to estimate the cost of equity. According to the SML, the cost of equity capital is:

Ke = Krf + � (Km - Krf)

Where:

Ke = Cost of equity

Krf = Risk-free rate

Km = Equity market required return (expected return on the market portfolio)

� = beta

Answer 2

The cost of equity capital is rather difficult to estimate because there is no definite commitment on the part of the company to pay dividends.

Explanation:

The cost of equity capital is rather difficult to estimate because there is no definite commitment on the part of the company to pay dividends.

However there are various approaches for computing the cost of capital . They are:

• The SML approach or CAPM model
• Bond yield plus risk premium approach
• Dividend growth model approach
• Earnings price ratio approach

In finance, the cost of equity is the return (often expressed as a rate of return) a firm theoretically pays to its equity investors, i.e., shareholders, to compensate for the risk they undertake by investing their capital. Firms need to acquire capital from others to operate and grow.

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Companies prefer equity capital because it is less expensive it is true or false

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