Module II· Cost of Equity & CAPMAdvanced
Question
How do you defend the CoE assumptions in an interview when an MD asks 'Why 10.5% — sounds high'?
Answer
Structured defense:
- 'Rf 2.3% — 10-year government bond spot, convention.'
- 'Beta 1.15 — median of 8 comparable specialty-chemicals names, relevered to a target D/E of 0.5.'
- 'ERP 6.0% — Damodaran's implied ERP for the developed market, within the historical range.'
- 'Size premium 1.0% — Duff & Phelps decile 8 for a mid-cap under $1bn EV.'
- 'Cross-check: comparable strategic acquisitions ran at an implied CoE of 10–11% — we're in the range.'
Deep diveShow more details
Pitch tip
The key — defend each component individually with a market reference. MDs hate 'we just assumed 10.5%' and love 'we triangulated against Damodaran, Duff & Phelps, plus comparable transactions'. A top-quartile answer.