Suppose you are collecting information about these two firms: Jackson Corporation and Allied Industries, and would like to know which firm has higher stock's expected return to compare with its required return.
Each of them is expected to pay the same $1.5 million dollar dividend every year in perpetuity. Jackson Corporation is riskier and has an equity cost of capital of 15%.
Allied Industries is not as shaky as Jackson, so Allied has an equity cost of capital of only 10%. Assume that the market portfolio is not efficient.
Both stocks have the same beta and an expected return of 12%.Is equity cost of capital the same as what you are asking. Its 10%?