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Sir in this question , it has asked to calculate cost of equity. But in the question return on equity is given of 20%, so isn’t return on equity and cost of equity the same thing?
No.
The return on equity is the return that the company is getting on investment of the equity.
This is not the same as the investors required rate of return, and it is the investors required rate of return that is equal to the cost of equity.
But sir in mcq 208 of bpp kit where question says that calculate equity beta of IML co assuming its required annual rate of return on equity is 17% and stock market uses CAPM model to calculate equity beta. Here they are taking annual return on equity i.e 17% as cost of equity?
I know the wording can be confusing, but CAPM gives the required rate of return (i.e. the return required by the shareholders).
This question did not say ‘required rate of return’ is simply said ‘the return on equity’ which is the return that the company is getting on reinvestment.
Sir
In mcq 206 (Bpp kit) question says calculate using CAPM required rate of return on equity of AZT co. Here the required rate of return on equity means cost of equity which would be calculated using CAPM, correct?
In mcq 208 of bpp kit where question says that calculate equity beta of IML co assuming its required annual rate of return on equity is 17% and stock market uses CAPM model to calculate equity beta. Here the required annual rate of return on equity of 17% means cost of equity, correct?
In carp co where question says return on equity is 20% so here it does not mean that cost of equity is 20% because it has simply said return on equity, correct?
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