Question:

How do we calculate the cost of equity for WACC without using CAPM?

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Due to the fact that the CAPM is highly unreliable to calculate cost of equity based on real data whereby the market return can appear to be negative when theoretically it is presumed to be positive, I cannot have negative required rate of return as my cost of equity as that would make my WACC screwed. So is there another method to calculate cost of equity? and I can't use the Gordon Growth model because that's unreliable too (how can we assume that the growth rate is constant in the real world)..

Thank you in advance :)

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  1. For forecasts & estimate purposes, you might try to just estimate the cost of equity as what the market would demand.  For an investor to hold the shares of the company, what do they expect in means of a return on that equity?

    They should demand more than a risk free asset of course.  How much risk is involved?  Can you attribute a beta to the equity over a given period of time?  How about other equities in the same business--what returns do they produce?

    It's forecasting, but you might find a reasonable cost of equity and then you can back into your WACC value.

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