Equity Investments issue: Rce = (1+Rf)(1+Rerp)-1 OR Rce =(estimated) Rf + Rerp The above equations were given for “ESTIMATES” of Rce for calculating the Pcs using the DDM. OK so why cant we just use CAPM? maybe they dont give you Beta…? so is Rf+Rerp the same thing as the CAPM just without the Beta? I am confused because in Cost of Capital they give you the following: CAPM = Rce = Rf+B(Rm-Rf) or use DDM = Div1/Pcs + Gdiv … Thoughts? maybe I am just hallucinating!
For market, the equation holds since beta is 1, but for a stock or portfolio, beta is needed, so I’m note sure that Rce=Rf - Rerp is correct unless somehow it is assumed in the long term beta does not matter? Good question.
see I agree with for market Beta =1 therefore beta is irrelevant, but this was saying we need to estimate or solve for Rce to be USED for the DDM DDM was solving for Pcs, price of common stock… so I am baffled as to why Beta was not included.
Although I’ve seen Rerp shown as beta * (Rm - Rf), in some other places based on my notes.
Dreary Wrote: ------------------------------------------------------- > Although I’ve seen Rerp shown as beta * (Rm - Rf), > in some other places based on my notes. — Dreary I just looked at my notes, they indicate: Market Risk Premium (mrp) = Rm-Rf BUT when you use (Rm-Rf) in an equity market index to estimate Beta, it is called EQUITY risk premium (erp) so I am guessing Rerp (not erp) = B*(Rm-Rf) and erp is simply is (Rm-Rf) — Rou
Guys, Rerp calculated for the Rce is totally different from the one calculated under CAPM.
strangedays Wrote: ------------------------------------------------------- > Guys, > Rerp calculated for the Rce is totally different > from the one calculated under CAPM. CRAP! -__- how come? I mean where is the Rerp coming from?
What I have is: Rerp = market risk premium = Market’s cost of equity (Rce) - Risk free rate (Rf) In some places Rerp is called “equity risk premium”. So there is a little bit of confusion but I’m sure we’ll find out what it is soon.