Discounted Cash Flow
<
Cost of Equity
Ke
│
▼
┌─────────────────────────────┐
│ Ke = Rf + β(Rm - Rf) │
└─────────────────────────────┘
│ │ │
│ │ └─► Equity Risk Premium
│ └─────────► Beta (β): Sensitivity to market
└─────────────────► Risk-Free Rate (Rf)
>
<h3>Cost of Equity (CAPM)</h3>
<math xmlns="http://www.w3.org/1998/Math/MathML" display="block">
<mi>K<sub>e</sub></mi>
<mo>=</mo>
<mi>R<sub>f</sub></mi>
<mo>+</mo>
<mi>β</mi>
<mo>(</mo>
<mi>R<sub>m</sub></mi>
<mo>-</mo>
<mi>R<sub>f</sub></mi>
<mo>)</mo>
</math>
<p><strong>Where:</strong></p>
<ul>
<li><strong>Rf:</strong> Risk-free rate (e.g., U.S. Treasury yield)</li>
<li><strong>β:</strong> Beta, a measure of volatility vs. the market</li>
<li><strong>Rm:</strong> Expected market return</li>
</ul>
</div>
