Why Is It Appropriate to Use the Required Rate of Return

question 67

Essay

Why is it appropriate to use the required rate of return on equity capital (rather than the weighted average cost of capital)as the discount rate in the residual income valuation approach?

---

Definitions:

Discount

The reduction applied to the nominal or face value of something, typically used in the context of bonds or selling goods and services at below their listed prices.

Coupon Bond

A bond that pays the holder a fixed interest rate (the coupon) periodically until maturity, at which point the principal and final interest payment are made.

Par Value

Par value is the face value of a bond or stock as stated by the issuing company, which does not necessarily reflect its market value.