Cost of Equity! — OpenTuition Forums

Nneric10y ago

First, I would like to thank our amazing lecturer. You are really helping the whole world. Just wanted to hear your views on how can someone come up with the cost of equity in a small economy where there is no stock market and you want to appraise a certain investment. The only data you can get is a risk free investment and the banks lending rate. May be you work in a company which want to invest in a certain project. Which factors would you consider to come up with the cost of capital which you could use for the DCF. Thanks

John MoffatTutor10y ago#1

Thank you for your comments. Quite frankly, if there is no stock exchange then it is not really possible to come up with a cost of equity. Presumably there are as a result few shareholders, and the object as always is to satisfy the shareholders. So measures such as the accounting rate of return are likely to be more relevant than DCF. If you were using DCF then calculating the IRR and choosing projects with the higher IRR's would perhaps be more sensible. If there are other companies operating in a similar business, then you could try and see what returns they were giving to shareholders, but again it would be difficult - partly actually being able to get the information, and also of course because there would be no share prices to base it on.

Nneric10y ago#2

Thanks so much for your insights Sir!

John MoffatTutor10y ago#3

You are welcome :-)

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