What does 'rfr' represent in the Cost of Equity formula?

In the Cost of Equity formula, 'rfr' represents the Risk-Free Rate. This is a critical component in finance and investment analysis, as the Risk-Free Rate is used to gauge the minimum return an investor would expect for an investment that is considered free from default risk. It reflects the returns on investments with virtually no risk, such as government bonds from stable countries.

The Risk-Free Rate serves as a baseline for investors; all other investments must typically provide a higher return to compensate for their associated risks. When calculating the Cost of Equity, the Risk-Free Rate is combined with a risk premium to account for the additional risk of equity investments compared to risk-free assets. Hence, recognizing 'rfr' as the Risk-Free Rate is essential for accurately assessing the cost associated with capital that equity investors supply to a firm.