Section 3
Approaches to Calculating the Cost of Capital
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Version 3
By Boundless
By Boundless
Boundless Finance
Finance
by Boundless
4 concepts
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The Capital Asset Pricing Model
The capital asset pricing model helps investors assess the required rate of return on a given asset by measuring sensitivity to risk.
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The SML Approach
The SML is the graphical representation of CAPM used to determine if an asset is priced to offer a reasonable expected return for the risk.
Discounted Cash Flow Approach
A discounted cash flow analysis is a highly useful tool for calculating the net present value of a given product, process, asset, or organization.
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The "Bond Yield Plus Risk Premium" Approach
We can estimate the value of a company's equity by adding its risk premium to the yield to maturity on the company's long-term debt.