I have to value a stock of a company of which I have some certain evidence to support that the cost of equity will decline in the future, should I use an unique Ke or some different Ke ?
If you expect it to decline, I’d show it declining. Why not?
No one does this in the business valuation community. I see equity analysts do it sometimes though and I noticed that the winners of the 2013 CFAI Research Challenge did this in their report. The question for me is if the risk of the business at a certain point in time reflects let’s say a 15% discount rate, who am I to say that the risk of the business will decline in the future?
What do you mean by ‘The question for me is if the risk of the business at a certain point in time reflects let’s say a 15% discount rate, who am I to say that the risk of the business will decline in the future?’ ?
Actually, I am doing CFA Research Challenge. I am not sure if it is a common practice. I did see some champions of CFA RC did the same thing. What do you think?
Discount rates can definitely change over time. Capital structure is a prime example of how WACC could change.
If a company grows to a given size, they could become less risky, which could lower their cost of equity.