The cost of a firm's equity

Question

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The cost of equity can be higher than the weighted average cost of capital (WACC) because the latter includes the cost of debt, which typically has a lower cost than equity. Additionally, the cost of equity is based on the risk and return expectations of investors, which can be influenced by factors such as market conditions, industry risk, and company-specific issues. A firm may have a higher cost of equity if investors perceive it to be a riskier investment, leading to a higher expected return to compensate for that risk. The cost of equity can be substantially higher than the firm's weighted average cost of capital because equity investors demand a higher return to compensate them for the greater risk they are taking on compared to debt holders. Additionally, the cost of equity is dependent on various factors, such as market conditions, company performance, and investor sentiment, which can drive up the cost of equity. Therefore, it is possible for the cost of equity to surpass the weighted average cost of capital.

The Cost of a Firm's Equity