Discard CAPM – There Is A Better Way To Think About Cost Of Equity

By Erik Kobayashi-Solomon, Managing Director - Framework Investing

The first rule of modern finance – that a dollar today is worth more than a dollar tomorrow – is an elegant first principle that underlies project financing as well as bond and equity investing.

This industry is projected to double in size from $22 billion to an estimated $44 billion

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However, in equity investing, the tactical implementation of this elegant principle – the rate used in discounted cash flow analyses – is contentious because of the subjectivity of choosing an appropriate rate. This subjectivity is born from the fact that, unlike bonds, stocks have no nominal coupon rate or face value from which to calculate the current market rate. Equity discount...