What is the correct answer??

[Portfolio Manager]

A CFAI answer states: ”the cost of equity (build-up method) = Risk-free rate + Equity risk premium + Small stock risk premium + Industry risk premium + Company-specific risk adjustment.”
BUT the book on pg 82 states:
“cost of equity (build-up method) = Risk-free rate + Equity risk premium + Small stock risk premium + Company-specific risk adjustment.”
Which version shall I go for?

 

[caschas]

Might be the Company Spec Risk include the Industry Risk, it’s a build-up so…
Personally I would go on adding anything that they give you and fits on the risk profile of the firm. I mean, if they list environmental risk premium for a travel agent… I’d be suspicious.

 

[MrSmart]

The question should make it clear.
Build up methods include any premiums related to the company.

 

[shootforthestars1]

don’t sweat over this - you won’t get a question wrong b/c of this CFAI question will be clearer.

 

[Portfolio Manager]

shootforthestars1 wrote:
don’t sweat over this - you won’t get a question wrong b/c of this CFAI question will be clearer.

Thanks guys - cheers