The correct Treasury rate to use in calculating the cost of equity (when using the CAPM) for a firm is a short-term rate.

Question

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The correct Treasury rate to use in calculating the cost of equity (when using the CAPM) for a firm is a long-term rate. This is because the cost of equity represents the compensation that investors require for taking on the risk of investing in the company's stock over the long term. Therefore, a long-term Treasury rate better reflects the time horizon of the cost of equity.

The Correct Treasury Rate to Use in Calculating the Cost