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Dear Sir,
We usually use CAPM to calculate the cost of equity however in question 1 – Mock 2 Novoroast Pls (Revision Kit – BPP) the cost of debt is calculate by CAPM. Please help to explain.
Thanks,
KTCAPM determines the return required on any investment – it depends on the level of risk and that is measured by the beta.
Usually we are only given the beta of the equity and so have to use other ways to calculate the cost of debt (such as the IRR).
However in this question you are given the beta of the debt and therefore that determines the return to investors in exactly the same way that the equity beta determines the return to shareholder.
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