The approach to use a security’s beta for estimating the cost of capital. Introduction: Cost of capital refers to the return that the investors expect on a particular investment. In other words, it refers to the compensation demanded by the investors for using their capital. Beta is an important indicator of the risk of a security. It measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market.

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Chapter 10.8, Problem 1CC

Summary Introduction

To discuss: The approach to use a security’s beta for estimating the cost of capital.

Introduction:

Cost of capital refers to the return that the investors expect on a particular investment. In other words, it refers to the compensation demanded by the investors for using their capital.

Beta is an important indicator of the risk of a security. It measures the systematic risk of a risky investment by comparing the risky investment with the average risky asset in the market.

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