do we use wacc? cost of equity cost of debt or risk free rate
For example if you get a loan from bank or capital 100,000. You pay 6% interest on that anually. What is this 6% ?? This 6% is your cost of capital and for bank its rate of return what they are getting from you. Same here you wana buy a stock or ind give company the money (Lets assume loan) and you want to measure the required rate of return what will you use ?? COST OF EQUITY WACC = Mixed Capital Structures for both debt and equity Cost of E = For Equity Cost of Debt/Rf = For Debt So here you will use Cost of equity or required rate of return which in this calculation is computed by CAPM
yeah for DDM to discount back the cash flows you use the required rate of return on equity, or cost of equity. think about it you are discounting equity cash flows, using WACC is wrong, but using the rate investors require on equity investments is correct.