Hello everyone, I m a newbie who had a query. I was calculating cost of equity 4 few companies last year. I was using the CAPM formula. Now since markets were falling continously around this time (Sept) last year, the returns of the market were less than the risk free rate and there was no equity risk premium giving the overall cost of equity a negative value. Now i undertsand that a positive cost of equity is incorporated in the WACC to work out the discounting rate. A negative cost of equity implies the opposite and would mean that the stock is going to fall further. However how do I ascertain the WACC in such a case. I had this query for over a year now. PLzz help
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Cost of equity query
Replies (2)
Am summarizing for two cases :
1) Incase company wants to raise new funds
Mathematically will be that you incorporate the negative value of equity in the overall WACC formula and calculate interest rate. But there is an intuitive angle to it , consider if the cost of equity becomes negative, it implies that investors of long term finance (equity investors) find it more costly to invest the money than keep it with themselves.
For example if A wants to invest 100 in a company, he will be better off keeping the 100 with himself than investing in a company if the rate of return of equity is negative.
Thus while calculating WACC, you'll assume equity as an option does not exist and caclulate with debt only, since equity capital is not available as a source of finance.
2) WACC of existing capital structure of the company
In this case , I think , the CAPM gives a misleading result , it will be better to use the dividen yield plus growth model to estimate the price of equity. It gives a more stable result.
6 factors to choose the right diversified equity fund
To invest in a diversified equity fund, you need to pick the right one that suits your requirement best is plain wisdom. It is easier said than done. Where there are hundreds of equity funds each claiming the best returns, it is quite puzzling to zero in on one. And the problem gets further confounded by the self-seeking mutual funds agents .who survive only by cooking the figures.
https://www.holisticinvestment.in/diversified-equity-fund
Regards
Ramalingam K, MBA, CFP,
Director and Chief Financial Planner,
Holistic Investment Planners
“Best Performing Financial Advisor Award” Winners from CNBC TV18
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