Estimating the Cost of Capital

4 important questions on Estimating the Cost of Capital

What is the difference between volatility and beta i.e. What risks do they represent?

Volatility = Total risk
Beta = Market/ systematic risk

What is market capitalisation? How is it calculated?

Market Capitalization: Total market value of firm i’s outstanding shares
MV = Number of Shares of i Outstanding * price of i per share

What does alpha refer to in regards to Security Market Line and trade managers?

Alpha reflects the manager's ability to trade --> A risk-adjusted performance measure for the historical returns

if alpha >0 --> Stock performed better than predicted by the CAPM
if alpha < 0 --> Stock's historical return is below SML
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What is the difference between levered and unlevered beta? What does the unlevered beta assume?

Unlevered = Asset --> Beta assuming no debt and relates to the whole firm/ project
Levered = Equity


If the company has no debt, the two betas are the same

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