<t>I guess I don't know what you are asking. To me, any attempt to relate future and current cash flows should be done using discounting methods (IRR, NPV etc.). I don't know the theoretical underpinnings of the credit default spread methodology you are suggesting. What do you mean by "liability"? A...

<t>You should charge at least the present value of the future cash flow. Present value is determined using a discount rate applied to the future cash flow. In general, the discount rate is equal to the rate of return on similar-risk investments (not always easy to determine). Here, in essence, you a...

<t>Thanks for the link. That looks like a good resource to review.Could you be a bit more specific in how your post relates to my question, though? My thought is that the equation I originally provided simply does not take beta into account (though you could argue that it has an implicit beta built-...

<t>Thanks, gamoon07. That is helpful. I think you are correct -- the formula appears to be an attempt to express cost of equity per MM II. I originally though that it was a horribly botched WACC. Based on your input, I now think that it is actually just a slightly botched MM II. However, this raises...

Can anyone educate me as to the theory underlying the following formula for cost of equity? It does not seem to be based on CAPM, and I can't figure out what the rationale for the formula is. Thanks.