MM vs CAPM

[travelin.man119]

When calculating WACC and needing to find return on equity how do we know whether to use the standard CAPM or one of the MM equations?

 

[S2000magician]

If they want you to use one of the M-M equations, they’ll have to tell you so.
CFA Institute’s default formula for rCE is CAPM.

 

[defacto]

Just go by the inputs. If they throw Equity risk premium and Beta you’re obviously dealing with CAPM. If they offer capital structure inputs and they give you your WACC then it’s a MM question. Maybe I’m being naive but I would doubt they’d insert all of this info and leave you to determine what equation to use. If that happened, if the question was clearly focused on capital structure, I think it’s safe to assume M/M would be the way to go.
You raise a good issue though. There is just so much potential for confusion with the sheer number of concepts that pop back in a different way, with different equations, or the same equations with different names for variables (Vo or Po?), or variants to similar concepts.

 

[S2000magician]

defacto wrote:Just go by the inputs. If they throw Equity risk premium and Beta you’re obviously dealing with CAPM. If they offer capital structure inputs and they give you your WACC then it’s a MM question. Maybe I’m being naive but I would doubt they’d insert all of this info and leave you to determine what equation to use.

The won’t.
There’s no guessing on CFA exams. If you guess, you’re doing something wrong.