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Describe why two methodologies (CAPM and WACC) may produce different results.

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Describe why these two methodologies (CAPM and WACC) may produce different results.

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The solution gives a clear explanation of the two methods.

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I am going to start with the calculation of WACC (as an example) to show the difference. The firm's WACC is the cost of Capital for the firm's mixture of debt and stock in their capital structure. CAPM is a method to calculate the cost of equity. However there are two other methods like DCF (discounted cash flow model) and bond yield - plus - risk premium methods. Most of the times these methods give us close but different results. For example if we solely use DCF or CAPM method to ...

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