"Canadian firms rely more on subjective judgment than on formal models when computing the cost of...

"Canadian firms rely more on subjective judgment than on formal models when computing the cost of equity capital." what do you think.

Expert Solution

I do AGREE on this statement that Canadian firms are relying more upon the subjective judgement because computation of the cost of equity capital is not a quantitative analysis which is just involving calculating it through Capital Asset pricing model but it is also related to calculation of the cost of equity after ascertainment of the external environmental factors along with the desire of the shareholders and the fluctuations which is there in the equity capital due to the external factors and policy changes by the Macro environment which will impact the overall risk associated with the cost of equity capital.

Subjective judgement is always providing a better opportunity of assessment of the cost of equity capital after ascertainment of various factors which are risk adjusted along with various quantitative factors so it is a mix of qualitative and quantitative factor which will be providing a better analysis of determination of the cost of capital and it will offer the company with the proactiveness in its approach of discounting of various events in the cost of capital so it would be a better approach and Canadian forms are adopting it in order to discount is rather than just adopting quantitative approach of traditional model in calculation of the cost of equity.

jeff jeffy answered 2 years ago

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