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Cost of equity - Cost of equity(common stock and retained...

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Cost of equity (common stock and retained earnings) The cost of equity capital to use in computing a weighted average cost of capital (WACC), like most valuation oriented variables, is an estimate a nd not a known quantity. Broadly defined, any cost of capital (bond, preferred stock, etc.) is ‘the lowest rate of return investors would accept to purchase the bond, stock, etc. of the company. You could think of it as the discount rate that an investor would use to find the present value ( maximum price (s)he would pay)of the bond or stock. The investor forecasts what (s)he believes to be the future cash flows and the risk of those cash flows that an investor could expect. The investor comes up with the minimum required rate that would cause him /her to invest by examining rates that are currently being earned on investments with the same or similar risk in financial markets. The investor will see that higher return investments have higher risk. The rates in the market represent the opportunity cost to the investor (rate of return
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