Cost Of Capital Flashcards
1
Q
What are the limitations of the CAPM and how could incorporating a multi-factor model help?
A
CAPM assumes that the only risk that matters to investors is the systematic risk (how a stock moves relative to the overall market)
CAPM doesn’t account for other types of risks that could be important for specific industries, like regulatory changes or environmental factors in the water industry.
2
Q
Give me an example of a multifactor model you could use.
A
3
Q
Why is WACC used to calculate the allowed return from the RCV.
A
Water companies are allowed to earn a fair return on their RCV. This fair return is meant to compensate investors for the risk of investing in long term infrastructure.
