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sir can we calculate kd using capm . In one of bpp example risk free rate is 3%,market return is 7 %,debt beta is 0.2 and they have calculated kd as 3.8 % ,is this correct.
3+0.2(7-3)=3.8
in this formula which beta we actually use. Thanks.What BPP have done is correct.
The required return from any investment is calculated using the beta of that investment.
Usually we are doing it for equity in which case we use the beta of equity. The return required from debt is calculated in exactly the same way as for equity, but using the beta of debt. (But if we do not know a beta for the debt we are forced to assume that it is risk free and that therefore it’s beta is zero. )
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