Cost of Capital
Estimation and Applications
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An authoritative text on cost of capital for both the nonprofessional and the valuation expert-now revised and expandedIn endeavoring to practice sound corporate finance, there is perhaps nothing so critical, nor slippery, as cost of capital estimation. The second edition of Cost of Capital: Estimation and Applications combines a state-of-the-art treatise on cost of capital estimation with an accessible introduction for the nonprofessional. This comprehensive yet usable guide begins with an exposition of basic concepts understandable to the lay person and proceeds gradually from simple applica...
An authoritative text on cost of capital for both the nonprofessional and the valuation expert-now revised and expanded
In endeavoring to practice sound corporate finance, there is perhaps nothing so critical, nor slippery, as cost of capital estimation. The second edition of Cost of Capital: Estimation and Applications combines a state-of-the-art treatise on cost of capital estimation with an accessible introduction for the nonprofessional.
This comprehensive yet usable guide begins with an exposition of basic concepts understandable to the lay person and proceeds gradually from simple applications to the more complex procedures commonly found in the marketplace. New features of the revised and expanded Second Edition include chapters on Economic Value Added (EVA) and reconciling cost of capital in the income approach with valuation multiples in the market approach, as well as expanded coverage of cost of capital in the courts and handling discounts for marketability. Cost of Capital remains an incomparable resource for all parties interested in effective business valuation.
List of Exhibits.
Foreword.
Preface.
Acknowledgments.
Introduction.
Notation System Used in This Book.
Part I: Cost of Capital Basics.
1. Defining Cost of Capital.
2. Introduction to Cost of Capital Applications: Valuation and Project Selection.
3. Net Cash Flow: The Preferred Measure of Return.
4. Discounting versus Capitalizing.
5. Relationship between Risk and the Cost of Capital.
6. Cost Components of a Company's Capital Structure.
7. Weighted Average Cost of Capital.
Part II: Estimating the Cost of Equity Capital.
8. Build-up Models.
9. Capital Asset Pricing Model.
10. Proper Use of Betas.
11. Size Effect.
12. DCF Method of Estimating Cost of Capital.
13. Using Ibbotson Associates Cost of Capital Data (Michael W. Barad and Tara McDowell).
14. Arbitrage Pricing Model.
Part III: Other Topics Related to Cost of Capital.
15. Minority versus Control Implications of Cost of Capital Data.
16. Handling the Discount for Lack of Marketability.
17. How Cost of Capital Relates to the Excess Earnings Method of Valuation.
18. Common Errors in Estimation and Use of Cost of Capital.
19. Cost of Capital in the Courts.
20. Cost of Capital in Ad Valorem Taxation (Carl R.E. Hoemke).
21. Capital Budgeting and Feasibility Studies.
22. Central Role of Cost of Capital in Economic Value Added (Joel M. Stern, G. Bennett Stewart III, and Donald H. Chew Jr.).
Appendixes.
Appendix A: Bibliography.
Appendix B: Courses and Conferences.
Appendix C: Data Resources.
Appendix D: Developing Cost of Capital (Capitalization Rates and Discount Rates) Using ValuSource PRO Software (Z. Christopher Mercer, ASA, CFA).
Appendix E: Iterative Process Using CAPM to Calculate the Cost of Equity Component of the Weighted Average Cost of Capital (Harold G. Martin, Jr., MBA, CPA/ABV, ASA, CFE).
Appendix F: International Glossary of Business Valuation Terms.
Appendix G: Converting After-tax Discount Rates to Pretax Discount Rates.
CPE Self-study Examination.
Index.
In endeavoring to practice sound corporate finance, there is perhaps nothing so critical, nor slippery, as cost of capital estimation. The second edition of Cost of Capital: Estimation and Applications combines a state-of-the-art treatise on cost of capital estimation with an accessible introduction for the nonprofessional.
This comprehensive yet usable guide begins with an exposition of basic concepts understandable to the lay person and proceeds gradually from simple applications to the more complex procedures commonly found in the marketplace. New features of the revised and expanded Second Edition include chapters on Economic Value Added (EVA) and reconciling cost of capital in the income approach with valuation multiples in the market approach, as well as expanded coverage of cost of capital in the courts and handling discounts for marketability. Cost of Capital remains an incomparable resource for all parties interested in effective business valuation.
List of Exhibits.
Foreword.
Preface.
Acknowledgments.
Introduction.
Notation System Used in This Book.
Part I: Cost of Capital Basics.
1. Defining Cost of Capital.
2. Introduction to Cost of Capital Applications: Valuation and Project Selection.
3. Net Cash Flow: The Preferred Measure of Return.
4. Discounting versus Capitalizing.
5. Relationship between Risk and the Cost of Capital.
6. Cost Components of a Company's Capital Structure.
7. Weighted Average Cost of Capital.
Part II: Estimating the Cost of Equity Capital.
8. Build-up Models.
9. Capital Asset Pricing Model.
10. Proper Use of Betas.
11. Size Effect.
12. DCF Method of Estimating Cost of Capital.
13. Using Ibbotson Associates Cost of Capital Data (Michael W. Barad and Tara McDowell).
14. Arbitrage Pricing Model.
Part III: Other Topics Related to Cost of Capital.
15. Minority versus Control Implications of Cost of Capital Data.
16. Handling the Discount for Lack of Marketability.
17. How Cost of Capital Relates to the Excess Earnings Method of Valuation.
18. Common Errors in Estimation and Use of Cost of Capital.
19. Cost of Capital in the Courts.
20. Cost of Capital in Ad Valorem Taxation (Carl R.E. Hoemke).
21. Capital Budgeting and Feasibility Studies.
22. Central Role of Cost of Capital in Economic Value Added (Joel M. Stern, G. Bennett Stewart III, and Donald H. Chew Jr.).
Appendixes.
Appendix A: Bibliography.
Appendix B: Courses and Conferences.
Appendix C: Data Resources.
Appendix D: Developing Cost of Capital (Capitalization Rates and Discount Rates) Using ValuSource PRO Software (Z. Christopher Mercer, ASA, CFA).
Appendix E: Iterative Process Using CAPM to Calculate the Cost of Equity Component of the Weighted Average Cost of Capital (Harold G. Martin, Jr., MBA, CPA/ABV, ASA, CFE).
Appendix F: International Glossary of Business Valuation Terms.
Appendix G: Converting After-tax Discount Rates to Pretax Discount Rates.
CPE Self-study Examination.
Index.