Cost of capital : Question 4
Question 3: When calculating the cost of holding assets, what method should be used to calculate the return on equity?

Be careful – the cost of holding assets will only correspond to a return on equity if the company does not have debts. In the opposite case, the required rate of return on assets is the weighted average cost of capital.

The cost of equity is calculated as the rate of return for risk-free assets (government bonds) plus a risk premium that depends on the market risk of the asset.

For more information, see chapter 23 of the Vernimmen.