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Hi John
Why have we used return on equity 11% in place of cost of equity for discounting?In theory, the shareholders required rate of return (and therefore the cost of equity) will be equal to the return on equity (as is indicated by the symbols on the formula sheet).
Usually we don’t apply this because we have information about the beta etc.. However here we do not have that information for the current position, which is where the answer has used 11%.
(You can, of course, see my lectures working through the whole of this question linked from the main AFM page (the ‘Revision Kit Live’ link)).
ok, thankyou. Saw the video earlier in the day. However there was no mention of why we have used ROE. i guess that was the common sense assumption to make!
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