Question

can we get negative cost of equity. and what does it represents.

Answer 1

Hoot! You just asked your first question! Hang tight while I find people to answer it for you. You can thank people who give you good answers by clicking the 'Good Answer' button on the right!

Answer 2

I don´t think so. In fact, it´s an unlikely thing to imagine. But, if you consider the beta equation (leveraged beta), depending on debt to equity level, it´s possible to find.

Answer 3

No you can't, how is that possible? Beta is always positive in a DCF valuation.

Answer 4

You ´re right Brulee. But completing my last answer, if the firm´s equity will be negative the beta is negative as well. Remember that beta depends on unleveraged beta, debt to equity level and equity. I´m from Brazil and here there are some studies that have found that situation.

Answer 5

I agree, if the beta is negative you can get a negative cost of equity, the stock might be uncorrelated with the market, so it is highly defensive.

Answer 6

Beta can be negative in theory, but when you do the DCF valuation, you never use a negative beta. Rare are the stocks with a negative beta (gold stocks).
Vinicius, the unlevered beta can be negative when you do the regression but the DE can't be since you use the market values in their computations.

Answer 7

But in DCF valuation you use the WACC, I don't understand why it can't be negative if as you say the stocks are indeed rare...

Answer 8

Let us say that the RWACC is negative, what happens with the present value of operating assets if you value a firm with a negative rwacc?

Answer 9

Maybe you are right but I have considerations for it, as the proportion of debt might be substantial which in this case the negative cost of equity is cancelled out.

Answer 10

using CAPM, it could happen when beta is negative, since risk free rate cant be negative

Answer 11

Beta is never negative in CAPM, you take the absolute value of it. You can't have a negative beta, all of your computations would be wrong. It's a measure of volatility of the stock in CAPM so it's never negative.

Answer 12

http://en.wikipedia.org/wiki/Beta_coefficient ok then someone ought to amend this page of wikipedia

Answer 13

In CAPM it doesn't exist. What don't you understand? Ask Damodaran himself. It's a measure of volatility, you use the absolute value. Do a little research on it and stop posting wikipedia links.

Answer 14

great, so beta in CAPM can't be negative. Since expected market return would always be more than the risk-free rate, as in capm we assume that every investor (or risk-adverse investor) would always choose a portfolio that will enchance their risk-adjusted return. so in that way, market risk premium won't be negative, or else that investor would be a dumbo to do so. beta, as argues by you, can't be negative in CAPM, agreeable in a way, as an investor would not want to invest in a stock that would bring negative as more risk is taken. in that sense, this holds. if we were to plot the Security Market Line (SML), it would always be positively sloped, and the steeper the slope the higher would the beta be, with the horizontal axis being the beta and vertical being expected return.

It is also assumed that investors are long that equity, as if they were to short it, they would prefer a negatively sloped SML, and many other assumptions. And also, negative beta never really exist anyway. I get what u mean, it exists, but just that it doesn't apply in CAPM. Fair enough.

Answer 15

we hardly see a negative beta while calculating the CAPM.I did not face one yet.But I doubt how it is possible.Every company has risk involved.I agreed that defensive stocks may not have many risk but atleast some risk would be there..So,dont think negative beta really exist in real world..

Answer 16

in CAPM it doesn't apply royb13, but have a look at this by Aswath http://aswathdamodaran.blogspot.com/2009/02/can-betas-be-negative-and-other-well.html

Answer 17

I read some articles about negative betas and what I meant in my first post is that you can theoretically use it in CAPM but it doesn't exist in real life. I don't think the value of the firm with a negative cost of equity is an accurate valuation of a company. If you have anymore articles about it I'd be grateful if you post them.
Thank You.